Price Floor Effect On Equilibrium

If it s not above equilibrium then the market won t sell below equilibrium and the price floor will be irrelevant.

Price floor effect on equilibrium. The most common example of a price floor is the minimum wage. However price floor has some adverse effects on the market. A price ceiling is a legal maximum price but a price floor is a legal minimum price and consequently it would leave room for the price to rise to its equilibrium level. Figure 2 illustrates the effects of a government program that assures a price above the equilibrium by focusing on the market for wheat in europe.

For a price floor to be effective it must be set above the equilibrium price. Price floor minimum price the lowest possible price set by the government that producers are allowed to charge consumers for the good service produced provided. When a price floor is put in place the price of a good will likely be set above equilibrium. In other words a price floor below equilibrium will not be binding and will have no effect.

A price ceiling creates a shortage when the legal price is below the market equilibrium price but has no effect on the quantity supplied if the legal price is above the market price a price ceiling below the market price creates a shortage causing consumers to compete vigorously for the limited supply limited because the quantity supplied declines with price. Drawing a price floor is simple. Types of price floors. Governments usually set up a price floor in order to ensure that the market price of a commodity does not fall below a level that would threaten the financial existence of producers of the commodity.

In the absence of government intervention the price would adjust so that the quantity supplied would equal the quantity demanded at the equilibrium point e 0 with price p 0 and quantity q 0. Price floor is enforced with an only intention of assisting producers. Simply draw a straight horizontal line at the price floor level. Price floors are mostly introduced to protect the supplier.

Price floors are only an issue when they are set above the equilibrium price since they have no effect if they are set below market clearing price. This graph shows a price floor at 3 00. Price floors can also be set below equilibrium as a preventative measure in case prices are expected to decrease dramatically. When they are set above the market price then there is a possibility that there will be an excess supply or a surplus.

If price floor is less than market equilibrium price then it has no impact on the economy. It must be set above the equilibrium price to have any effect on the market. But if price floor is set above market equilibrium price immediate supply surplus can. For a price floor to be effective the minimum price has to be higher than the equilibrium price.