Question

What is maximum price ceiling? Explain its implications.

Explain the effects of 'maximum price ceiling' on the market of a good'? Use diagram

What are the effects of 'price-floor' (minimum price ceiling) on the market of a good? Use diagram

What is maximum price ceiling? On what type of goods is it normally imposed? Use diagram.

Answer 1

A price ceiling is the maximum price of a good which sellers can expect from buyers. This price is fixed by the government and is lower than the equilibrium market price of a good(OP^e). Hence, the price ceiling leads to the excess of demand and contract of supply.

Effects of price ceiling:
1. Price ceiling enables the availability of basic goods at reasonable prices to the poor. This enables to increase the welfare of the people.

2. When there is a fall in the price level, the demand for good increases more than the supply of the good. Hence, it creates an excess demand for the good.

3. A consumer receives only a limited quantity of goods because the fixed quota system is followed. So, the consumer would not be able to satisfy his/her needs.

4. Goods which are available at ration shops are mostly of a low quality.

5. As the consumer demands are not satisfied, they are willing to pay a high price for satisfying their demand in the market. This results in black-marketing which reduces the actual availability of goods in the market.

Answer 2

The price floor means the minimum price fixed by the government for a good in the market. The government fixes this price on agricultural products and food grains in particular. A minimum price is fixed which the traders must pay to the farmers in the wholesale market. Thus, the income of the farmer is regulated and a continuous production is assured. In the diagram, the equilibrium price and quantity are OP and OQ. As the equilibrium price is low for farmers, the government fixes the price floor, i.e. the price level increased from OP to OP₁ which leads to a decline in the quantity demand, and therefore, there is excess supply in the market.

Effects of price floor:

1) The government ensures to buy the full production of the farmers which are not sold in the market at the price floor. Hence, they are able to produce the maximum level of output.

2) Farmers are ensured with the minimum returns as their products are completely sold in the market at the comparatively higher price. This leads to an increase in their level of income.

3) Because of the price floor, consumers and traders in the market are forced to pay the higher price than the equilibrium price.

4) The interests of the farmer are protected by the government and they are forced to store the excess supply as a buffer stock including the storage cost of their product.

5) The cost incurred by the government is borne by consumers and traders in the form of tax, i.e. the consumption of excess supply at the higher price in the market.