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QUESTION 
Equilibrium
 
Supply of and demand for good Q are initially in equilibrium as shown in the diagram below. 
G
E
H
P
S
D
Price
Quantity
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PART A: THE BUSINESS ORGANISATION, ITS STAKEHOLDERS AND THE EXTERNAL ENVIRONMENT 
 
114
 
The Government introduces a maximum price P. What effect will this have on the quantity of good Q 
purchased? 
A 
It will rise from G to E 
C 
It will fall from H to G 
B 
It will rise from E to H 
D 
It will fall from E to G 
ANSWER 
D 
The initial equilibrium quantity is E (where supply and demand curves intersect). Quantity 
demanded at the controlled price P will be H. However, only quantity G will be supplied and 
purchases will therefore be limited to this amount. Therefore, the quantity purchased will fall 
from E to G due to the shortage of supply available. 
 
8.3 Minimum prices 
Minimum price legislation aims to ensure that suppliers earn at least the minimum price (or floor price) 
for each unit of output they sell. 
If the minimum price is set below the market equilibrium there is no effect. But if it is set above the 
market price, it will cause an excess supply (see surplus 'AB' in Figure 14). This has been a recurring 
problem in Europe, where minimum prices guaranteed by agricultural subsidies have resulted in the 
'butter mountains' and 'wine lakes' of past years. 
In Figure 14, the minimum price Z is set above the equilibrium price P. The quantity demanded falls 
from Q to A but the quantity supplied increases to B because the higher price encourages suppliers to 
supply more. There is excess supply equal to the quantity AB. 
Price
Minimum price
Quantity
A
Q
B
P
Z
M
Equilibrium price
S
D
Figure 14 Minimum price above equilibrium price 
The problem with floor prices is that more of the good will be produced than can be sold at the 
minimum price, and so surplus quantities will build up, which have to be either stored or destroyed. 
Either way, the floor prices lead to a misallocation of resources. 
To try to prevent oversupply and 'dumping' of excess supply at low prices, a system of