Q.What is meant by 'Price Floor'? Explain using a suitable example.

Part (a)

A price floor is a government-imposed minimum legal price for a good or service, below which it may not be sold. To be effective (binding) it must be set above the market equilibrium price. At that higher price, quantity supplied exceeds quantity demanded, so a binding price floor creates a surplus (excess supply).

Example — Minimum Support Price (MSP) for crops: the government fixes an MSP for wheat above the equilibrium price to protect farmers' incomes. Farmers supply more than buyers demand at that price, creating a grain surplus that the government must procure and store. (Minimum wages are another example — a floor in the labour market that can create a surplus of labour, i.e. unemployment.) …

Part (a) — Price Floor

A price floor is a legally fixed minimum price set by the government for a good or service; sellers are not permitted to sell below it. The aim is usually to protect producers/sellers by guaranteeing them a remunerative price.

For a price floor to have any real effect, it must be set above the market equilibrium price (a floor set below equilibrium is non-binding, because the market price is already higher). A binding price floor has the following effects:

• At the higher floor price, quantity supplied rises while quantity demanded falls.
• The result is a surplus (excess supply): $Q_S > Q_D$.
• The government often has to buy up and store the surplus, or find other ways to dispose of it.

Example — Minimum Support Price (MSP). The government announces an MSP for foodgrains such as wheat and rice, above the free-market equilibrium price, to assure farmers a minimum income. At this price farmers produce and offer more than consumers wish to buy, so a surplus arises which government agencies (e.g. the Food Corporation of India) procure and stock. Another example is a minimum wage, a floor in the labour market that can create a surplus of labour (unemployment) if set above the equilibrium wage. …