A Price Floor Set Above The Equilibrium Price Is Always Be A Binding Price Floor

A price floor set at 6 a price floor set at 6 would be non binding because it is a government mandated minimum price that is set below the equilibrium price.

A price floor set above the equilibrium price is always be a binding price floor.

Another way to think about this is to start at a price of 100 and go down until you the price floor price or the equilibrium price. Look at the figure the market for milk. The equilibrium price commonly called the market price is the price where economic forces such as supply and demand are balanced and in the absence of external. This changes nothing because at this price there is a shortage which drives prices up.

A binding price floor is a required price that is set above the equilibrium price. A price floor must be higher than the equilibrium price in order to be effective. A non binding price floor is one that is lower than the equilibrium market price. Nothing is preventing prices from rising so nothing will change.

If the equilibrium price of gasoline is 3 00 dollars per gallon and the government places a price ceiling on the gasoline of 4 00 dollars per gallon the result will be a shortage of gasoline. A price ceiling is a legal maximum price but a price floor is a legal minimum price and consequently it would leave room for the price to rise to its equilibrium level. Note that the price floor is below the equilibrium price so that anything price above the floor is feasible. If a price floor that is above the equilibrium price is imposed on a market and the government buys the surplus what will happen to consumer and producer surplus.

Drawing a price floor is simple. A price ceiling set above the equilibrium price is not binding. A price floor is a government or group imposed price control or limit on how low a price can be charged for a product good commodity or service. A non binding price floor is set below the equilibrium price.

In other words a price floor below equilibrium will not be binding and will have no effect. This has the effect of binding that good s market. In this case the market price would serve as a rationing mechanism because the price floor would have no effect on the market. Simply draw a straight horizontal line at the price floor level.

This graph shows a price floor at 3 00. For a price floor to be effective it must be set above the equilibrium price. The equilibrium market price is p and the equilibrium market quantity is q. If it s not above equilibrium then the market won t sell below equilibrium and the price floor will be irrelevant.

A minimum price set above the equilibrium price is a. Consider the figure below. If there were a binding price floor in the market for milk the price could be.