Minimum price (price support or price floor)
A price
is set above the equilibrium price to favour producers especially the farmers
(Figure 2. 18). It is illegal to buy a commodity below this price. A minimum price encourages more production
and protects the farmers from price fluctuations. It increases the producer's
revenue.
The price determined by the forces of demand and supply is OP1 government interferes and sets price of OP2- At the minimum price a surplus, of Q2Q3 occurs. To solve this problem of surplus, an agency must be set up to buy the surplus stock, and store it if possible. This therefore increases the demand at the minimum price. The demand curve shifts to the right from D1 to D2.