Ineffective Price Floor

The most common example of a price floor is the minimum wage.

Ineffective price floor.

You can now see that the equilibrium price is below the price floor so it is not possible for the equilibrium price to be attained. When society or the government feels that the price of a commodity is too low policymakers impose a price floor establishing a minimum price above the market equilibrium. Figure 2 b shows a price floor example using a string of struggling movie theaters all in the same city. Price floors are also used often in agriculture to try to protect farmers.

3 wasted labor resources 4 inefficient amount of job search price floor below equilibrium there will be no surplus unemployment it is the price at which the price ceiling is. By observation it has been found that lower price floors are ineffective. Since our original price floor of 4 00 was ineffective what happens if we increase the price floor to 10 00. The original consumer surplus is g h j and producer surplus is i k.

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. 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. Price ceilings and price floors can be either effective or ineffective. This will raise the price floor line on the graph above the equilibrium price level.

The current equilibrium is 8 per movie ticket with 1 800 people attending movies. The net effect of the price floor in the above activity is that the price floor causes the area h to be transferred from consumer to producer surplus but also causes a deadweight loss of j k. Implementing a price floor. For a price floor to be effective the minimum price has to be higher than the equilibrium price.

As you learned in the lessons above any price set above the equilibrium price is an ineffective price ceiling but is an effective. The most common price floor is the minimum wage the minimum price that can be payed for labor. When the price is above the equilibrium the quantity supplied will be greater than the quantity demanded and there will be a surplus. A price floor is the lowest legal price a commodity can be sold at.

This analysis shows that a price ceiling like a law establishing rent controls will transfer some producer surplus to consumers which helps to explain why consumers often favor them. Price ceiling price floor effective and ineffective. Price floors are used by the government to prevent prices from being too low.