A Price Floor Set Below The Free Market Equilibrium

Simply draw a straight horizontal line at the price floor level.

A price floor set below the free market equilibrium.

Government set price floor when it believes that the producers are receiving unfair amount. It s generally applied to consumer staples. Drawing a price floor is simple. 39 because minimum wage is a price floor a it will be set below the market equilibrium price.

If it s not above equilibrium then the market won t sell below equilibrium and the price floor will be irrelevant. If price floor is less than market equilibrium price then it has no impact on the economy. Economics microeconomics consumer and producer surplus market interventions and international trade market interventions and deadweight loss price ceilings and price floors how does quantity demanded react to artificial constraints on price. Price floors and price ceilings often lead to unintended consequences.

If a price floor is set above the free market equilibrium price as shown where the supply and demand curves intersect the result will be a surplus of the good in the market. A price floor example. A price floor could be set below the free market equilibrium price. In a perfectly competitive market products are priced at the pareto optimal point.

Price floors prevent a price from falling below a certain level. The intersection of demand d and supply s would be at the equilibrium point e 0. D it will maximize consumer surplus. Price floor is enforced with an only intention of assisting producers.

When a price floor is set above the equilibrium price quantity supplied will exceed quantity demanded and excess supply or surpluses will result. B it will create a deadweight loss. For a price floor to be effective it must be set above the equilibrium price. The government has mandated a minimum price but the market already bears and is using a higher price.

In this case the floor has no practical effect. The result of the price floor is that the quantity supplied qs exceeds the quantity demanded qd. In the first graph at right the dashed green line represents a price floor set below the free market price. However a price floor set at pf holds the price above e 0 and prevents it from falling.

Introduction to deadweight loss. C it will increase the number of jobs available in the labor market.