Question

Explain the concept of Maximum Price Legislation with the help of a diagram.

Answer 1

The government's greatest legal price below a commodity's equilibrium price is called a price ceiling. This helps low and middle-income people afford essentials. Goods are limited when the highest price is below equilibrium because demand exceeds supply. Black marketing, hoarding, and rationing may result.

This diagram shows the effect of minimum price legislation, also called a price floor, like the Minimum Support Price (MSP).

• Equilibrium is at point E, where demand = supply, at price P₀ and quantity OQ₀.
• The government sets a minimum price (floor) at P₂, which is above the equilibrium price.
• At P₂, quantity supplied is OQ₂, but quantity demanded falls to OQ₁, leading to: Excess supply (surplus) = Q₂ – Q₁ (KH in the diagram).
• This surplus may require government intervention, like purchasing the excess stock to maintain the price floor.