Price floor and price ceiling are the price mechanism employed by government to safeguard the interests of producers and consumers.
When government thinks that the prevailing prices of commodities that consumers buy and producers sell are unfair for both, it brings price control policies advised by economists.
In markets, absolute equilibrium is rarely occuring phenomenon, and most of the times, whenever market fails to bring justice for either of participants, government is bound to act to recorrect through pricing policies. Here, you will learn about price floor and price ceiling in detail.
Understanding concepts of price floor and price ceiling
Government policies of price control highlight the second role of economists as advisors to regulate functionality of markets.
Technically speaking, price floor and price ceiling are the instruments of price control in favour of both buyers and sellers.
In terms of prices crash of any commodity, government implements price floor to save producers from huge losses. Whereas, whenever prices of commodities skyrocket making buyers unaffordable, government brings price ceiling policies to help buyers.
Because, it is very necessary to protect the interests of both market participants. Even today, pricing policies have huge role in maintaining certain level of equilibrium.
Impacts of pricing policies for market
In the previous blogs we have learnt about how demand and supply laws work and elasticity of demand and supply affect the market outcomes.
Supply of demanded quantity is directly correlated with the rise and fall of prices of given commodites. So, more the price, higher the supply and vice-versa.
And, if the prices of given commodites decline, the demand rises in response and vice-versa.
Then, what would be the result when there is a price floor and price ceiling? Obviously, supply of commodities will not be like earlier and so the fate of demand.
Relationship between pricing policies and principles of economics
Earlier, we saw that markets are usually good way to organise economic activity, and governments can sometimes improve market outcomes.
In this case, economists does both. Some argue in favour of free forces of market, whereas, some show urgency for government’s interventions in correcting market failures.
Last words on price floor and price ceiling,
The above mentioned things are essential only when there is a situation making market outcomes worse for either buyers or sellers. Otherwise, the market will contract and economic growth will slow down suddenly.
Advocators of free trade oppose any form of barriers and restrictions, whereas, opponents hammer down the mere profit seeking mentality and support the idea of equitable distribution.
This is all about the price mechanism of Price floor and price ceiling to safeguard the interests of producers and consumers.
Solved questions on Price Floor and price ceiling
Q. 1 What is price floor and price ceiling? Why are threy employed?
And: Price floor and price ceiling are also called as floor price and ceiling price. These prices are nothing but the mechanism employed by government for che ch and balance of prices if commodities in market.
These are economic market instruments to safeguard the economic interests of producers and consumers whenever there is unnecessary rise or fall of commodity prices.
Q. 2 How do price floor and price ceiling work?
Ans: Price floor is that price which government or concerning authority issues specific price for specific commodity when price plunges unnecessarily which incurs producers loss. So government declares a minimum price blow which that specific commodity will not be bought or sold. This protects producers from losses.
On the other hand, when prices of commodities soars then it becomes difficult and unaffordable for buyers or consumers to buy that commodity. So to protect consumers interests, government decides the maximum price for a specific commodity beyond which seller can not sell that commodity. This maximum price is called as price ceiling or simple ceiling price.
Q.3 Why floor price and ceiling prices are employed?
Ans: These prices are an economic instrument in the hand if government. According to law if supply and demand, when supply increases demand decreases and vice versa.
When demand increases supply also increases, after certain stage prices of some commodities plunge down . Here government employes floor price to save producers from huge losses owed to rapid fall of prices.
On the opposite side, as supply decreases demand increases and so the prices. Due to this prices of some commodities skyrocket and make consumers or buyers unaffordable to buy them.
Last words on price floor and price ceiling,
Though market has it’s own ability to recorrect itself, most of the time it hardly works perfectly.
So, to avoid this and safeguard consumers interests, government fixes the maximum price for certain commodities beyond that price sellers or producers are not permitted to sell those commodities.
By doing this exercise government tries to bring market equilibrium and protect producers as well as consumers from economic losses.
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