Micro

Market Equilibrium

Easy

Comprehension:

FLOOR PRICES

For certain goods and services, fall in price below a particular level is not desirable and hence the government sets floors or minimum prices for these goods and services. The government imposed lower limit on the price that may be charged for a particular good or service is called price floor. Most well-known examples of imposition of price floor are agricultural price support programmes and the minimum wage legislation. Through an agricultural price support programme, the government imposes a lower limit on the purchase price for some of the agricultural goods. Similarly, through the minimum wage legislation, the government ensures that the wage rate of the labourers does not fall below a particular level.

The market determined price of a good is Rs. 40.The government fixes the minimum price of the good as Rs. 50. Calculate the excess demand/excess supply it will cause if the demand and supply functions are Qd = 200 – p and Qs = 120 + p respectively.

Excess demand of 20 units.

Excess supply of 20 units.

Excess demand for 50 units.

Excess supply of 30 units.

✅ Correct Option: 2

Option 1 -> At price Rs. 50, demand = 150 and supply = 170. Since supply > demand, there's excess supply, not demand.

Option 2 -> At government fixed price Rs. 50: Qd = 200 - 50 = 150 units and Qs = 120 + 50 = 170 units. Excess supply = 170 - 150 = 20 units.

Option 3 -> Calculation shows excess supply of 20 units, not excess demand of 50 units.

Option 4 -> Excess supply = Qs - Qd = 170 - 150 = 20 units, not 30 units.

Hence, Option 2: Excess supply of 20 units -> When government sets a minimum price (price floor) of Rs. 50, which is higher than the equilibrium price of Rs. 40, suppliers want to supply more (170 units) while consumers demand less (150 units). This creates excess supply of 20 units in the market. A price floor above equilibrium always results in excess supply as the artificially high price encourages production but discourages consumption -> correct

Question 42

Floor prices are meant for the welfare of

Question 43

Imposition of price floors usually lead to following

Question 44

To be effective, the floor price should be determined

Question 45

The market determined wage rate is $500 per month whereas the minimum wage fixed by the government is $$450 per month. As a result of this government intervention,

The market determined price of a good is Rs. 40.The government fixes the minimum price of the good as Rs. 50. Calculate the excess demand/excess supply it will cause if the demand and supply functions are Qd = 200 – p and Qs = 120 + p respectively.

Solution

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