A Price Floor Set Below The Free Market Equilibrium

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 set below the free market equilibrium.

Price floors prevent a price from falling below a certain level. This graph shows a price floor at 3 00. Price floors and price ceilings often lead to unintended consequences. 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.

However price floor has some adverse effects on the market. A price ceiling is a maximum amount mandated by law that a seller can charge for a product or service. In the first graph at right the dashed green line represents a price floor set below the free market price. Government set price floor when it believes that the producers are receiving unfair amount.

Simply draw a straight horizontal line at the price floor level. In this case the floor has no practical effect. Drawing a price floor is simple. A price floor example.

C it will increase the number of jobs available in the labor market. If price floor is less than market equilibrium price then it has no impact on the economy. A price floor could be set below the free market equilibrium price. The intersection of demand d and supply s would be at the equilibrium point e 0.

The government has mandated a minimum price but the market already bears and is using a higher price. If it s not above equilibrium then the market won t sell below equilibrium and the price floor will be irrelevant. However a price floor set at pf holds the price above e 0 and prevents it from falling. B it will create a deadweight loss.

Introduction to deadweight loss. In a perfectly competitive market products are priced at the pareto optimal point. 39 because minimum wage is a price floor a it will be set below the market equilibrium price. D it will maximize consumer surplus.

The result of the price floor is that the quantity supplied qs exceeds the quantity demanded qd. When a price floor is set above the equilibrium price quantity supplied will exceed quantity demanded and excess supply or surpluses will result.