Price Floor Definition Economics Example

Price floor is a situation when the price charged is more than or less than the equilibrium price determined by market forces of demand and supply. By observation it has been found that lower price floors are ineffective. Price floor is a price control typically set by the government that limits the minimum price a company is allows to charge for a product or service its aim is to increase companies interest in manufacturing the product and increase the overall supply in the market place.

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A price floor is a minimum price enforced in a market by a government or self imposed by a group.

Price floor definition economics example.

This control may be higher or lower than the equilibrium price that the market determines for demand and supply. This graph shows a price floor at 3 00. It tends to create a market surplus because the quantity supplied at the price floor is higher than the quantity demanded. A few crazy things start to happen when a price floor is set.

More specifically it is defined as an intervention to raise market prices if the government feels the price is too low. Drawing a price floor is simple. You ll notice that the price floor is above the equilibrium price which is 2 00 in this example. It s generally applied to consumer staples.

Similarly a typical supply curve is. This lesson will discuss the economic concept of the price floor and its place in current economic decisions. A price ceiling is a maximum amount mandated by law that a seller can charge for a product or service. A price floor or a minimum price is a regulatory tool used by the government.

It will provide key definitions and examples to assist with illustrating the concept. A price floor is an established lower boundary on the price of a commodity in the market. Simply draw a straight horizontal line at the price floor level. Demand curve is generally downward sloping which means that the quantity demanded increase when the price decreases and vice versa.

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 this case since the new price is higher the producers benefit. Price floor has been found to be of great importance in the labour wage market.