Question

Explain and examine how total surpluses in a perfectly competitive market compares when a price floor is in effect, compared to no price floor.

Identify how the government’s use of legal price floors to favor suppliers in perfectly competitive markets influences the total surplus generated.

Described how governments pay, if they purchase the unsold product, when a price floor is in effect.

Answer 1

Supply Demond Son Date Page Supe ClassSmart 5 100 DEO i via 04 © ww, D, * * HONNÝ Disco Ety a poverty amidst Effects Plenty" 0 1600 || Excess supply (۹ gnoia farmers PARADOX a Piling up of stocks u Greut. purchases the excess in bulk and maintaing it as BUFFER STOCK distributes it the fair Price shops!! I ODA 0184 بلو) ارمل - رم

y S O floor Price Binoling and ween Binding Binding case to Won Binching case Binding Binding Price Pz Cflooma price) Neon-Bind non Floor Price) B2 PA S D & Q q2 X Noon t'ue os it is Price floors ane established by Gaut. an cerder to ensure that market Price does net fall below a level that would result in noi Non-existence of pareducers So, Binding Pace is greater than The edilibsium price. Poceducers are better and @pl consumer are weerse ceff in molaket. Neen binding is a price floor which is Set acomer than the locuilibrium paice. effectiu lamer than equilibrium price sooo Pareduces will be waerse off and consumers will be at better place as they are getting goods at few price. effective in market

Total surplus of consumers after price floor will decrease as the price level fir them will increase

However total producer surplus will increase after the price floor which will protect the producers in the economy with high price supports.

So due to high prices, there will be excess supply

Which means demand is less so there will be pulling up of stocks. So govt will purchase the excess in bulk and

1 maintain it as buffer stock for future or

2 distributes to the fair price shops from where poor coustomers can buy goods at low prices.

Government will pay for this all by

The 1 revenue generated by taxation

2 non tax resources like fees, charges, tolls etc

3 profits it earned from public sector understanding

4 borrowings.