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production quotas
might be introduced whereby each supplier is only allowed to produce up to a maximum quantity and 
no more. For some types of produce, the EU tried to overcome the problem of excess supply by 
imposing quotas on farmers.
Where 
maximum prices 
are imposed, there will be 
excess demand
: rationing may be necessary, and 
black marketeers may seek to operate. Where 
minimum prices 
are imposed, producers will make 
excess 
supply
. 
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CHAPTER 4
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MICROECONOMIC FACTORS 
 
115 
QUESTION 
Floor prices
 
What are the economic impacts of the Common Agricultural Policy (CAP) and other floor price schemes? 
ANSWER 
CAP guarantees a minimum price above the market equilibrium price. Therefore it encourages an excess 
of supply over demand, creating surplus production of agricultural goods. 
However, it provides price and income stability for the farmers producing the goods. 
 
8.4 Minimum wages 
A minimum wage is an application of floor pricing in the labour market. 
The UK now has minimum wage legislation. The purpose of a minimum wage is to ensure that low-paid 
workers earn enough to have an acceptable standard of living. If a minimum wage is enforced by 
legislation (a 
statutory minimum wage
), or negotiated nationally for an industry by a trade union, the 
minimum wage will probably be above the current wage level for the jobs concerned. This would have 
two consequences. 

To raise wage levels for workers employed to a level above the 'equilibrium' wage rate 

To reduce the demand for labour and so cause job losses 
Wage
Quantity of labour
0
Q
Q
m
w
Minimum wage
S = MC
in free
labour
market
D = MRP 
L
L
W
M
X
Y
Figure 15 Minimum wage
Without a minimum wage, Q
w
workers would be employed at wage rate W (Figure 15).