Government Imposed Price Floor

Buffer stocks where government keep prices within a certain band.

Government imposed price floor.

The price is plotted on the. In other cases the government intervenes to maintain the prices of production factors at a higher level than the equilibrium price to protect the income. Government price controls are situations where the government sets prices for particular goods and services. The government establishes a price floor of pf.

Suppose the government sets the price of wheat at p f. The equilibrium price commonly called the market price is the price where economic forces such as supply and demand are balanced and in the absence of external. Therefore prices in the market can t fall below pf. Maximum price limit to how much prices can be raised e g.

These price floors and price ceilings are used to help manage scarce resources and protect buyers and sellers. A price floor is a government or group imposed price control or limit on how low a price can be charged for a product good commodity or service. When the economy is in a state of flux the government may set minimums and maximums on the price of some goods and services. Price floors and ceilings are inherently inefficient and lead to sub optimal consumer and producer surpluses but.

A price floor must be higher than the equilibrium price in order to be effective. Price floors can have differing effects depending on other government policies. At price pf consumer demand is qd less than q due to downward sloping demand curve demand curve the demand curve is a line that shows how many units of a good or service will be purchased at different prices. Like price ceiling price floor is also a measure of price control imposed by the government.

If the government agrees to purchase a specific maximum of unsold products at the price floor it. A price floor that is set above the equilibrium price creates a surplus. Limiting price increases in a privatised. It is legal minimum price set by the government on particular goods and services in order to prevent producers from being paid very less price.

Typically a price floor is imposed when the economic activity slows down and the supply of certain products is low resulting in an increase in prices at levels that consumers cannot handle. Notice that p f is above the equilibrium price of p e. But this is a control or limit on how low a price can be charged for any commodity. Demand curve is generally downward sloping which means that the quantity demanded increase when the price decreases and vice versa.

Figure 4 8 price floors in wheat markets shows the market for wheat. It tends to create a market surplus because the quantity supplied at the price floor is higher than the quantity demanded. Similarly a typical supply curve is. A price floor is a minimum price enforced in a market by a government or self imposed by a group.

This is usually done to protect buyers and suppliers or manage scarce resources during difficult economic times. Types of price controls.