How does a price floor affect a consumer who is also a producer?
The government puts a price floor on corn. Korn Chips, a company that produces corn chips, is a consumer of corn as it needs it to make it's chips. Due to the price floor, demand for the consumer decreases, while supply from the corn farmers increase creating a surplus. How does this effect the demand Korn Chips has for corn? How does this effect the supply of chips it sells to it's consumers and the price for which it sells the chips at?
Comments
Actually price floor for raw material automatically sets up price floor for the product it is used to make, but price floor for products is not official so it is hidden.Marketing strategy of producer takes care.
You are confusing the terms. Price controls affect sellers and buyers. It doesn't matter whether the buyer is using the good to consume himself or produce another good for the fact that there is a surplus or shortage. But for goods that are produced from the good that is price floored there will be less investment and production of corn chips (and more investment elsewhere) because an increase in costs makes it more unprofitable. This will ultimately decrease supply and raise prices.
Theoretically, the price of chips will increase,and the quantity demanded for chips will decline. But it will depend on elasticity of demand and supply as well. I guess the demand for chips is elastic,but the demand for corn is inelastic, because it has less substitutes. So the price for chips will increase less than the price of corn. I also guess that the supply of corn is inelastic,but elastic in the case of chips. So the chip producer will take some incidences of the price floor effect. The surplus of corn is on the contrary,will be the burden of the government and the tax payers.