GOVERNMENT PRICE CONTROLS

MINIMUM PRICES

A minimum price is a price floor set by the government where the price is not 

allowed to fall below this set level (although it is allowed to rise above it).

Reasons for setting a price floor:

•  To protect the earnings of producers – in certain industries prices are 

subject to great fluctuations.  Minimum prices will guarantee producers 

income in periods when prices would otherwise have been very low.  

Examples include certain agricultural products. 

•  To create a surplus – in periods of glut surpluses can be stored in 

preparation for possible future shortages.

•  To guarantee a certain level of earnings – workers can be given a 

minimum wage so that their earnings don’t fall below a certain 

(unacceptable) level.

The diagram below shows the effects of a minimum price: 

The minimum price has created a surplus (excess supply) of Qs – Qd.  There 

are three ways in which the government can deal with this surplus: 

The government purchases all the surplus to store it, destroy it or sell it in 

other markets.  If the government seeks to do this then it has to buy up the 

excess (Qs – Qd) at the current minimum price.  This means the cost to the 

government and therefore taxpayer is the shaded area QdabQs.

The government could artificially lower supply to Qd by issuing quotas which 

limit production. 

Demand could be raised by advertising, finding alternative uses or by taxing 

substitutes.

MAXIMUM PRICES

A maximum price is a price ceiling set by the government where the price is 

not allowed to rise above this set level (although it is allowed to fall below).

The reason for setting a maximum price is so that the prices of necessities 

don’t rise too much in times of shortage.  Such a situation is common in times 

of war and/or famine.

The maximum price has caused a shortage (excess demand) equal to Qd – 

Qs.  The government can deal with this in two ways:

•  First come first serve – this is the situation in a lot of eastern European 

countries and means that huge queues are common. 

•  Rationing – Purchases are limited by the number of coupons or 

vouchers issued.  Such as was seen during WWII.

•  Encouraging more homegrown production – as seen in WWII.

•  Drawing on stores from previous surpluses. 

Problems with maximum prices include:

•  Black markets – Selling of rationed goods illegally at very high prices to 

consumers who feel that they are not able to purchase enough legally. 

•  Reduces the supply of already scarce products. 

SPECIALISATION

Specialisation is occurs when an economic agent chooses to concentrate on
producing a particular good or service and then trade with others in order to
survive.


Nations can specialise, e.g.:
•  Saudi Arabia – oil.
•  South Africa – mining.
•  Columbia – coffee.

Regional specialisation can also occur, e.g.:
•  London – finance.
•  Torquay – tourism.
•  Cheddar - cheese

Firms specialise in certain goods or services, e.g.:
•  NatWest – banking.
•  Ford – cars.
•  Woolworths – retailing.

Specialisation by individuals is called the division of Labour. Adam Smith
described the effects of the division of labour on pin workers in 1776. He
stated that one worker might be able to make 20 pins a day, but if division of
labour occurred and 10 workers each specialised in a different task he
estimated they could make 48,000 pins.
This increase in labour productivity occurs for a number of reasons:

•  Specialisation allows workers to gain skills in a narrow range of tasks.
This means workers are far more productive then if they were a jack of
all trades.
•  It makes it cost effective to provide workers with specialist tools, e.g., it
wouldn't make sense to give every farm worker a tractor, but it's
possible to provide a group of workers a tractor they can share.
•  Time is saved as workers don't constantly have to change tasks, e.g.
moving from one workstation to another.
•  Workers are able to specialise in tasks they are best suited to.
The division of labour does have limitations. Jobs that are very narrow can
become tedious and boring. Workers will do everything possible to avoid
work, e.g. calling in sick, long break, frequent visits to the toilet. This will result
in a drop in productivity as output per worker falls.
The size of the market might limit the degree of specialisation. A chemist or
post office might open in a small village, but finds that he has to sell other
products in order to survive.

Over specialisation has disadvantages. African countries are often dependant
on only one crop. If the price falls or crop fails, it can be a disaster for the
economy and workforce.
The north of England has suffered greatly due it's dependence on heavy
manufacturing. Shipyard, steel and textile workers paid a heavy price for
specialisation when demand for their skills fell.