Minimum price or a floor price is sometimes prescribed by the government whereby a good cannot be sold below that price. The minimum price is generally fixed for the sale of agricultural products by the farmers. The idea behind setting up a minimum price is to ensure farmers a reasonable income by prevention price to fall if there is a bumper crop would lead to a sharp fall in price and adversely affect farmers' incomes. With a view to stabilizing agricultural prices, the government fixes a minimum price at which farmers would sell. If there is excess supply at that minimum price, the government purchases all the excess quantity. If the market price is too high above the minimum price, then the government sells its stocks in the market to maintain price at a reasonable level, thus protecting consumers' interests.
There is often a conflict between price stabilization and income stabilization. With stable prices, farmers’ income would fluctuate in the same direction as the output. Higher output means higher income and lower output results in low incomes. On the other hand, fluctuating prices have opposite effect on farmers’ incomes. Bumper crop means crashing prices and lower income, while lower output results in high price and higher incomes. The government price policy should strive to achieve a relative price stability (movement of prices within a narrow band) and greater income stability for the farmers.
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