What is meant by Price Floor? Discuss in brief, any one consequence of imposition of floor price above equilibrium price with help of a diagram.
Or
How is the price of a commodity determined in a perfectly competitive market?
Explain with help of a diagram.
What is meant by Price Floor? Discuss in brief, any one consequence of imposition of floor price above equilibrium price with help of a diagram.
Or
How is the price of a commodity determined in a perfectly competitive market?
Explain with help of a diagram.
A Floor price is the minimum price at which a commodity can be sold legally. Floor price if fixed above the equilibrium price, serves the purpose of welfare of the producers (say farmers). When price floor is fixed at P” quantity demanded will contract to OQ” but at this price, suppliers will be ready to supply OQ’. As a result, surplus of QQ” will emerge.
Imposition of floor prices above equilibrium price will have the following major implications:
a) Surpluses: The quantity actually brought and supplied will shrink as a direct consequence of price flooring, as a result, a part of producer’s stock will remain unsold. As shown in the figure the surplus of Q’Q” arises.
b) Buffer Stock: In order to maintain the support price, the government may design some programmes to enable producers to dispose of their surplus stocks. One such programme can take the form of buffer stock. Government may purchase the surplus to store or sell it at subsidised prices. Subsidy is required to lower the price and make it competitive in the market. Government may also use it as aid and send it to other countries. (any one to be explained)
Or
Price of a commodity is determined by market demand and market supply of a commodity, (i.e. industry is the price maker).
An individual producer/firm has no role in the determination of the price of the commodity (firm is a price taker).
No individual seller or buyer can influence the price of the commodity.
DD and SS are Market demand and market supply curves intersecting at E. OQ quantity (Equilibrium Quantity) would be offered for sale and demanded by the buyers at OP price (Equilibrium Price) per unit. The industry is in equilibrium.
A Floor price is the minimum price at which a commodity can be sold legally. Floor price if fixed above the equilibrium price, serves the purpose of welfare of the producers (say farmers). When price floor is fixed at P” quantity demanded will contract to OQ” but at this price, suppliers will be ready to supply OQ’. As a result, surplus of QQ” will emerge.
Imposition of floor prices above equilibrium price will have the following major implications:
a) Surpluses: The quantity actually brought and supplied will shrink as a direct consequence of price flooring, as a result, a part of producer’s stock will remain unsold. As shown in the figure the surplus of Q’Q” arises.
b) Buffer Stock: In order to maintain the support price, the government may design some programmes to enable producers to dispose of their surplus stocks. One such programme can take the form of buffer stock. Government may purchase the surplus to store or sell it at subsidised prices. Subsidy is required to lower the price and make it competitive in the market. Government may also use it as aid and send it to other countries. (any one to be explained)
Or
Price of a commodity is determined by market demand and market supply of a commodity, (i.e. industry is the price maker).
An individual producer/firm has no role in the determination of the price of the commodity (firm is a price taker).
No individual seller or buyer can influence the price of the commodity.
DD and SS are Market demand and market supply curves intersecting at E. OQ quantity (Equilibrium Quantity) would be offered for sale and demanded by the buyers at OP price (Equilibrium Price) per unit. The industry is in equilibrium.
