What happens when a minimum price is imposed in a market?

Analyze the question: A minimum price is a price floor, which is a legal minimum set by the government. The question asks what effect this has on the market.

Explain the concept: A price floor is usually set above the equilibrium price to protect producers. Examples are minimum prices for farm produce such as cocoa, groundnut, or grains. Because the price cannot legally fall below the floor, the market cannot move back to equilibrium.

Step-by-step solution:

1. At the higher minimum price, the quantity demanded falls, because consumers buy less at a higher price.
2. At the same higher price, the quantity supplied rises, because producers want to sell more.
3. Now Quantity Supplied > Quantity Demanded.
4. This excess supply is called a surplus.

Example: Equilibrium price of a bag of maize is ₦20,000. The government sets a minimum price of ₦25,000. At ₦25,000, farmers supply more bags than buyers want, so unsold stock piles up. That is a surplus.

Checking the options:

• A. Shortage occurs: this happens with a maximum price (price ceiling) below equilibrium. ✗
• B. Surplus occurs: correct. ✓
• C. Market maintains equilibrium: a binding price floor prevents equilibrium. ✗
• D. Many firms will close down: this is not the direct, general effect. Producers are actually protected. ✗

Exam tip: Remember "Floor → Surplus" and "Ceiling → Shortage". A minimum price (floor) gives a surplus, while a maximum price (ceiling) gives a shortage. Also remember that the price control only has an effect if it is set away from equilibrium.