question_answer

What is minimum price ceiling? Explain its implications.

Or

If the prevailing market price is above the equilibrium price, explain its chain of effects.

Answer:

Minimum price ceiling: Minimum price ceiling is also known as price floor, which is the minimum allowable price set above the equilibrium price by the government.

The need for minimum price ceiling arises when government finds that equilibrium price is too low for the producers. This policy is in the interest of producers. It leads to surplus and illegal selling below the equilibrium price.

For effective minimum support price or price floor, it must be accompanied by government purchases either to increase its buffer stocks or exports.

Implication of Minimum Price Ceiling;

(a) Minimum price ceiling ensures the farmers that they will get the minimum price for their production which helps them to produce more in order to earn their bread and butter with the help of government. It also states that their whole produce will be sold in the market.

(b) With the minimum price given by the government to the farmers, increases the income of the poor people.

Or

When the prevailing price is above the equilibrium price, then there is condition of excess supply. Excess supply induces seller to all more and in order to sell more, seller has to reduce the price of their output. The fall in price will continue till the price reaches the equilibrium price where market demand and market supply equals and the equilibrium price is fixed.

As can be seen in the above graph that at price\[O{{P}_{2}}\], the quantity supplied is \[O{{Q}_{3}}\]while the quantity demanded is \[O{{Q}_{2}}\] so there is the excess supply of \[{{Q}_{2}}{{Q}_{3}}\] is the market. Hence this leads to the seller to sell their output or lower prices. With the fall in price the quantity demanded of the commodity increases. The price continues to fall till is reaches\[O{{P}_{1}}\]. At \[O{{P}_{1}}\] price the quantity demanded becomes equal to quantity supplied \[O{{Q}_{1}}\] and the equilibrium establishes at Point E.