Micro

Market Equilibrium

Medium

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.

Imposition of price floors usually lead to following

Excess demand.

Excess supply.

Shortage of goods in the market.

Determination of market equilibrium.

✅ Correct Option: 2

Option 1 -> Excess demand occurs when price is set below equilibrium (price ceiling), not with price floors.

Option 2 -> When a price floor is set above equilibrium price, quantity supplied exceeds quantity demanded, creating excess supply.

Option 3 -> Shortages occur with price ceilings (maximum prices), not price floors which create surpluses.

Option 4 -> Price floors prevent market equilibrium by artificially keeping prices above the natural equilibrium level.

Hence, Option 2: Excess supply -> A price floor is a minimum price set above the market equilibrium. At this artificially high price, producers want to supply more goods (higher quantity supplied) while consumers want to buy less (lower quantity demanded). This mismatch creates a surplus or excess supply in the market. Classic examples include minimum wage laws and agricultural price supports, both of which can lead to unemployment (excess labor supply) and crop surpluses respectively. -> correct

Question 41

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.

Question 42

Floor prices are meant for the welfare of

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,

Imposition of price floors usually lead to following

Solution

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