Explain each conditions and draw graphically : a. For protect farmers, the government set a minimum price of grain. b. The LPG price should not exceed the price set by the government
The government can have control over the price of goods or commodities by using two tools properly known as price ceiling and price flooring. A price ceiling is also known as the legal maximum, and price flooring is known as the legal minimum.
To protect farmers setting a minimum price of grain by the government is an example of price flooring. Price flooring is a legal minimum on the price at which goods can be sold. It can be binding and non-binding. In most of the cases, price flooring is binding in which the legal minimum is more than the equilibrium market price.
As shown in the diagram above, the equilibrium price is P*, and the equilibrium quantity is Q*. But to protect the interest of farmers, the government sets a minimum price (P’) above the equilibrium price (P*) and farmers get the minimum selling price for their goods (grains). But setting such price creates a surplus in the market as quantity supplied exceeds quantity demanded.
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