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Explain the concept of 'buffer stock' as a tool of price floor OR Market for a product is in equilibrium. Supply of the product 'decreases'. Explain the chain of effect of this change till the market again reaches equilibrium. Use diagram.

Answer» <html><body><p></p>Solution :Buffer stock is an important tool in the hands of govemment to ensure <a href="https://interviewquestions.tuteehub.com/tag/price-1165141" style="font-weight:bold;" target="_blank" title="Click to know more about PRICE">PRICE</a> floor. If in case, the market price is lower than what the govemment feels should be given to the farmers/producers, it would purchase that commodity at higher price from the farmer/producers so as to maintain stock of the commodity with itself, to be released in case of shortage of the commodity in future. <br/> OR <br/> When the supply decreases, demand remaining unchanged, the supply curve shifts to the left from <a href="https://interviewquestions.tuteehub.com/tag/ss-632580" style="font-weight:bold;" target="_blank" title="Click to know more about SS">SS</a> to `S_(1)S_(1)`. <br/> `**` When supply decreases to `S_(1)S_(1)`, it creates an excess demand at the old equilibrium price of OP. <br/> `**` This <a href="https://interviewquestions.tuteehub.com/tag/leads-540453" style="font-weight:bold;" target="_blank" title="Click to know more about LEADS">LEADS</a> to competition among buyers, which raises the price. <br/> `**` Increase in price leads to <a href="https://interviewquestions.tuteehub.com/tag/rise-1189674" style="font-weight:bold;" target="_blank" title="Click to know more about RISE">RISE</a> in supply and fall in demand. <br/> `**` These changes continue <a href="https://interviewquestions.tuteehub.com/tag/till-709848" style="font-weight:bold;" target="_blank" title="Click to know more about TILL">TILL</a> the new equilibrium is established at point `E_(1)`. <br/> `**` Equilibrium price rises from `OP " to " OP_(1)` and equilibrium quantity falls from `OQ " to " OQ_(1)` <br/> <img src="https://d10lpgp6xz60nq.cloudfront.net/physics_images/SG_MIC_ECO_PW_E01_032_S01.png" width="80%"/></body></html>


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