Question

Explain the meaning of floor price with the help of a diagram.

Answer 1

Floor price, also known as the minimum support price (MSP), is the lowest price at which sellers are permitted to sell a particular good or service. This price is set to ensure that producers, such as farmers, receive a fair and profitable return for their products.

For a floor price to be effective, it must be set above the market equilibrium price. In the accompanying diagram, OP₀ represents the equilibrium price in a free market, while OP₁ is the imposed floor price. At this higher price level (OP₁), the quantity supplied exceeds the quantity demanded, leading to a surplus equal to the amount AB.

As a result, excess supply occurs at the floor price, and to prevent a market imbalance, the government is required to purchase the surplus from the producers, in this case, typically from farmers.