Question

Microeconomics:

No copy from the internet or slides is allowed.

Explain briefly how the price floor works in a market if the government applies it. Use a specific real-life example to argue for the application of it.

Answer 1

The price floor is normally a price which is set by the central authority or the government, normally above the equilibrium price(free market price) in the market.

At the price floor, since it is above the equilibrium price, the quantity supplied of the good or service is greater than the quantity demanded of the good or service. Hence, at the price floor there is is excess supply or Surplus of the good or service in the economy.

The price floor is always placed with the consideration of sellers in mind. Behind the price floor, the reason is to enhance the earnings of the sellers. As the price in the Market increases due to the price floor, the earnings per unit of good or service of the sellers Increases. Hence, with the application of the price floor, consumer surplus decreases but the producer surplus increases.

The real life example to argue for the application of it is the minimum price support(price floor) that is given to the petty and poor farmers in the developing countries. Without this minimum price support, the earnings of the farmers would be very volatile and it will be very difficult for them to survive as they are already very poor. Therefore, it is imperative for the governments in developing countries to use the price floor (in the form of minimum support price) to stabilize the earnings of the the poor and petty farmers.