What is the price floor?
There are 2 tools used by the government to control or improve the prices of essential commodities. These tools are the price ceiling and price floor.
Let’s understand this topic in detail.
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The price floor means that the government imposes a lower limit on the price that may be charged for a particular good or service. The price floor is also known as the minimum price ceiling.
When equilibrium price is determined by the market forces of demand and supply is considered to be unprofitable for the producer, the government intervenes to protect. the interest of the producer.
For example, agricultural price support programs, the minimum wage for labor, etc.
The government imposes a lower limit on the purchase of agricultural goods and the price floor is normally set at a higher level than the market-determined price for goods.
If the equilibrium price is 3, which is considered to be unprofitable which does not provide sufficient incentive to the farmers to produce, let’s say, sugarcane. Then the government declares a new price as 4, as the minimum price encourages the farmers to produce sugarcane.
But at the price floor, the quantity supplied becomes 40 ( which is more) and the quantity demand becomes 20 (which is less). Thereby, creating an excess supply of 20( 40 – 20).
The implication of the price floor
- Buffer stock – The government will but the unsold surplus, which is added to the buffer stock and it will be used during natural calamities for distribution through PDS(Public distribution system).
- Illegal selling – It may cause illegal selling below the minimum support price (price floor) because of the excess supply.
Tip to avoid confusion in price ceiling and price floor.
1. The ceiling of the room is up, but the price ceiling is placed below the equilibrium price.
2. The floor of the room is down, but the price floor is placed above the equilibrium price.
Remember, it is reverse.
You can read the related concepts:
- The Price Ceiling
- Perfect Competition
- Monopoly Market
- Monopolistic Market
- The price elasticity of supply
- The supply curve
- What is the production function?
- Terms related to production concept
- Law of diminishing returns to a factor
- Total cost, Total variable cost, and total fixed cost
- The relation between TC, TVC, and TFC
- Average total cost
- The demand curve
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