Price Floor For Complement Goods

Types of price floors.

Price floor for complement goods. When the price of a particular good rises the demand for. It is legal minimum price set by the government on particular goods and services in order to prevent producers from being paid very less price. The most common example of a price floor is the minimum wage. A price floor is a minimum price enforced in a market by a government or self imposed by a group.

Similarly if the price of one good rises and reduces its demand it may reduce the demand for the paired or complementary good as well. Such a good may have little value without its complement. A price floor is an established lower boundary on the price of a commodity in the market. It tends to create a market surplus because the quantity supplied at the price floor is higher than the quantity demanded.

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. Demand curve is generally downward sloping which means that the quantity demanded increase when the price decreases and vice versa. However along with the decrease in demand for the car there will be automatically lesser demand for the tire used on the car. A complementary good is one used in conjunction with another good or service.

Let s assume that the price of the same car brand x has risen. But this is a control or limit on how low a price can be charged for any commodity. For example many governments intervene by establishing price floors to ensure that farmers make enough money by guaranteeing a minimum price that their goods can be sold for. For a price floor to be effective the minimum price has to be higher than the equilibrium price.

Similarly a typical supply curve is. This indicates that substitute goods have positive cross price elasticity.