Explain the effect of price floor …

✓Price floor •a mechanism by which the govt fixes a minimum price above the equilibrium price since the prevailing price is not yielding any benefits to the producers (especially farmers) •It is also known as minimum support price and it is assured to every farmer for their produce. •Effect- there is excess supply in the economy as the production increases due to attractive prices •Govt uses the tool of buffer stock i.e it stores the excess produce for times of food shortage or any such contingencies. •Role of price floor in reducing supply of money- since the supply of farm produce increases , the govt gives the farmers their assured price which is higher than the equilibrium price, this soaks liquidity from the economy and thus the money supply in economy reduces. ✓ Price ceiling • occurs when the govt fixes a maximum price below the equilibrium price because the prevailing price is too high for some sections to afford. •an example would be the rationing system adopted by the govt in which the bpl sections are provided the *essential items* at a very less price • effect of price ceiling- it leads to excess demand which in turn leads to black marketing •black marketing is a market in which the products are sold at a price higher than that fixed by the govt . It is an illegal practice and gets impetus from those people who are ready to pay high prices for buying the products, knowing that it is illegal. Hope you find it resourceful :)