What is meant by ‘Price Floor’ ? Explain using a suitable example.

OR

What is meant by ‘Price Ceiling’? Explain using a suitable example.

Price floor’ is the minimum price fixed by the government at which sellers can legally sell their product.

The effect of a price floor is mentioned below:

● When the government fixes the minimum price or the lower limit on the price that can be charged for a good or service, it is usually higher than the equilibrium price.

● This price is above the equilibrium price which implies an excess supply in the market.

● The sellers can try to sell their product at a price below the floor price because there is a surplus.

● This is usually imposed on agricultural price support programs and the minimum wage legislation.

● The x-axis represents the quantity demanded and supplied of wheat.

● The y-axis represents the price of wheat.

● D is the demand curve and S is the supply curve.

● Both the curves intersect at point E and the equilibrium price is OP.

● The government fixed the price floor at OP1. AB is the excess supply of goods.

● This is above the equilibrium level.

OR

Price ceiling' is the maximum price that sellers can legally charge for producing a service.

The effect of a price ceiling is mentioned below:

● When the government fixes the maximum price or the upper limit on the price that can be charged for a good or service, it is usually lower than the equilibrium price.

● Equilibrium price may be extremely high for some of the individuals to purchase.

● The government then intervenes and imposes the price ceiling.

● Since this price is below the equilibrium price, there is excess demand.

● The seller's me try to hold the good due to the shortage.

● This may even lead to black marketing.

● This is usually imposed on important items such as rice and wheat.

● The x-axis represents the quantity demanded and supplied of wheat.

● The y-axis represents the price of wheat.

● D is the demand curve and S is the supply curve.

● Both the curves intersect at point E and the equilibrium price is OP.

● OP might be too high for some of the people to afford.

● Wheat is a basic necessity product in every household, so the government intervene and imposes a price ceiling at OP1.

● This is below the equilibrium level.