A Price Floor Set Below The Free Market Equilibrium

Government set price floor when it believes that the producers are receiving unfair amount.

A price floor set below the free market equilibrium.

The intersection of demand d and supply s would be at the equilibrium point e 0. In the first graph at right the dashed green line represents a price floor set below the free market price. Price floor is enforced with an only intention of assisting producers. C it will increase the number of jobs available in the labor market.

Price floors prevent a price from falling below a certain level. In a perfectly competitive market products are priced at the pareto optimal point. However price floor has some adverse effects on the market. B it will create a deadweight loss.

However a price floor set at pf holds the price above e 0 and prevents it from falling. 39 because minimum wage is a price floor a it will be set below the market equilibrium price. In this case the floor has no practical effect. If price floor is less than market equilibrium price then it has no impact on the economy.

A price floor example. D it will maximize consumer surplus. It s generally applied to consumer staples. Simply draw a straight horizontal line at the price floor level.

A price floor could be set below the free market equilibrium price. Drawing a price floor is simple. When a price floor is set above the equilibrium price quantity supplied will exceed quantity demanded and excess supply or surpluses will result. Price floors and price ceilings often lead to unintended consequences.

For a price floor to be effective it must be set above the equilibrium price. 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. The result of the price floor is that the quantity supplied qs exceeds the quantity demanded qd. This graph shows a price floor at 3 00.

If it s not above equilibrium then the market won t sell below equilibrium and the price floor will be irrelevant. The government has mandated a minimum price but the market already bears and is using a higher price.