Question

TYPED ANSWER PLEASE

In present COVID-19 circumstances the government put the restriction on the hiking the prices of the medical items such as “face mask, Sanitizer and the Hand gloves).

Similarly, during the “Ramadan” government put restriction on raising the prices of the essential commodities used during this festive month of “Ramadan”

Considering these situation Discuss concept of

(a) Price Celling and Price Floor ( support with different example)

(b) Analyze the outcome of government intervention by applying these two restrictions.

Answer 1

A) Price ceiling is the upper limit imposed on price . It is the maximum limit of charging a price and a seller cannot charge a price higher than the price ceiling .

Example -: The essential food prices rose to $200 and the poor people suffered due to high prices. The govt imposed a price ceiling of $100 on food prices . Now the sellers cannot charge a price more than $100 and thus the food became affordable for the poor people.

Price Floor refers to the lower limit imposed on price . It is the minimum price that can be charged by the seller and any price below this limit cannot be charged .

Example -: In US economy , the farmers were not getting the right price . They had to incur $20 as cost on their produce but were getting only $18 as procurement price . This led to losses to the farmers. Now the govt intervenes and imposed a price floor of $25 on farm produce . The farmers will now get a price $25 or more than that but they cant be offered a price less than $25 for their produce.

B) Outcome of Price ceiling -:

In the figure market is at eq at point E with no govt intervention(free market). Now suppose the govt imposes a price ceiling at Pc which is above the equilibrium . It will have nio effect because it is above equilibrium and raising the price above equilibrium will decrease the demand so a price ceiling above equilibrium will have no effect. Now suppose the price ceiling is imposed at Pc1. This price ceiling will create a shortage as here demand is greater than supply . A price ceiling below equilibrium will create a shortage because it will force the sellers to charge a price Pc1 . This will decrease producer surplus and the some sellers will exit the market due to low prices and the demand will increase, thereby creating a shortage.

Outcome of Price floor -:

In the figure the market is at free eq at point E with OQ qty and OP price .

Now suppose the govt puts a price floor at Pf meaning that the seller cannot charge a price below Pf . This will have no effect as it is below equilibrium point . The seller is already receiving a higher price OP and has no incentive to lower the price to Pf .

Suppose the govt puts price floor at Pf1 meaning that it is the lowest price that can be charged now . Now a price above the equilibrium price will increase the producer surplus and they will increase the supply at this hoigher price to OQ1 . However, at higher price some consumers will exit the market and the demand will fall to OQ2 . This creates a situation of surplus where supply is greater than demand.

Conclusion -: A price ceiling above equilibrium has no effect but a price ceiling below equilibrium creates a shortage. Whereas , a Price floor below equilibrium has no effect and a price floor above equilibrium creates a surplus in the market.

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