Page 9 - Home Assignment-Price determination

Price floor:-

It refers to the minimum price, usually above the equilibrium price, set
by the Government to protect the interest of the producers of certain
goods.
Y
S

Price floor
Pri
ce P
E

D
X

O Q Quantity demanded
and

quantity supplied

In the aboe diagram the eqilibrium price OP and quantity OQ is
determined at point E where market demand = market supply. As the
market determined price is too low for the producers, the Government

determined the price at which is above the equilibrium price.i.e. price

floor.

Implications:-

 It will create an excess supply situation in the market,
Government will purchase it and mantains the buffer stock.
 Minimum Return is ensured by the Government to the producers.

 Maximum Level of output.
 Burden on Government and inflationary in nature.