If the government imposes a minimum price on a commodity

Analyze the question: A minimum price is a price floor. It is a legally set price below which the commodity cannot be sold. To have any effect, it must be set above the equilibrium price.

Explain the concept:

• Equilibrium price is where quantity demanded equals quantity supplied.
• A price floor above equilibrium raises the price.
• At the higher price, producers want to supply more (quantity supplied rises).
• Consumers want to buy less (quantity demanded falls).

Solution:

• At the minimum price, Qs > Qd.
• This gives excess supply, which is also called a market surplus or glut.
• Nigerian example: if the government fixed a minimum price for cocoa or grains above the market price, farmers would produce more than buyers would purchase, and the unsold stock would pile up. This is why governments often have to buy the surplus (buffer stocks or commodity boards).

Checking the options:

• A. Market surplus occurs: correct, since Qs > Qd.
• B. The market will be cleared: wrong. A surplus means the market does not clear.
• C. Excess demand occurs: wrong. Excess demand is the result of a maximum price (price ceiling) set below equilibrium.
• D. Government regulation is no longer needed: wrong. The minimum price is itself a government regulation, and it often needs enforcement.

Exam tip: Remember "Floor = Furplus." Minimum price (floor) leads to surplus. Maximum price (ceiling) leads to shortage. Always ask which side of the equilibrium the controlled price sits on.