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IB Price Floors Commentary. Rice from Thailand was being sold at 13,00 thousand baht, however the price floor that the government has introduced has pushed the lowest price for rice up to 15,000 baht

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Introduction

Price floors are instruments that are used by the government to raise the minimum price at which the goods can be sold at, hence increasing the quality of life of the people that are producing the good. Rice from Thailand was being sold at 13,00 thousand baht, however the price floor that the government has introduced has pushed the lowest price for rice up to 15,000 baht which is significantly higher than the previous price. ...read more.

Middle

The government decides to impose a minimum price of Pmin. This is done to increase the revenue of the farmers of rice, however this creates a new problem. At the new price of Pmin, only Q1 will be demanded, however Q2 will be supplied. If the government decides that it is not going to intervene any further, the quantity that is consumed will actually be reduced from Qe to Q1. ...read more.

Conclusion

To resolve this issue, the government needs to intervene and buy all the stock that cannot be sold. This will reduce the amount of surplus that exists in the market. Rice is a staple good in Hong Kong; many families depend on rice to make up a majority of their diet. This means that rice has a price inelastic demand, however the rice from Thailand is considered to a luxury product and therefore will be replaced with substitutes from other countries such as ...read more.

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