In the given diagram, OP is the market determined price and OP1 is the price fixed by the government.

(a) Identify if the diagram represents, price ceiling or price flooring.

(b) Discuss the likely behavior of the market in the given condition.

OR

Suppose the demand and supply equations of a commodity X in a perfectly competitive market are given by :

Qd = 1700 – 2P

Qs = 1300 + 3P

Calculate the value of equilibrium price and equilibrium quantity of the commodity X.

i) The diagram represents price flooring.

ii) The given figure shows the minimum price is above the equilibrium price.

The minimum price is the price which is fixed by the government which the producers must be paid for their produce. What is done when the government feels that the market forces of demand and supply estimate a price which is very low and will not help the producer to make any profit.

The x-axis represents the quantity in units and the y-axis represents the price in rupees. The demand and supply intersect at a point E. The equilibrium price is OP. If the government feels that this price is very low and the producer will not be able to make any profit, they will introduce a minimum price or support price which would be higher than the equilibrium price. This will help to protect the farmers and will give them an incentive for further production.

Let us assume that the government has set up the minimum price as OP. The quantity supplied at OP will be more than the quantity demanded, this would lead to an excess of supply equal to AB. This excess supply is either purchased by the government to increase the buffer stock or can be used for the purpose of export.

OR

The demand and supply equations of a commodity X in a perfectly competitive market are given by the following equation:

Qd = 1700 – 2P

Qs = 1300 + 3P

At equilibrium =

QD = QS

1700-2P = 1300+3P

1700-1300 = 3P+2P

400 = 5P

400/5 = P

P= 80

Qd = 1700 – 2P

Qd = 1700 – 2*80

Qd = 1700 – 160

Qd = 1540

Qs = 1300 + 3P

Qs = 1300 + 3*80

Qs = 1300 + 240

Qs = 1540

Equilibrium price is 80

Equilibrium quantity is 1540