PRICE FLOORS

A price floor is a government- or group-imposed price control or limit on how low a price can be charged for a product

A price floor can be set below the free-market equilibrium price. The government has mandated a minimum price, but the market already bears a higher price.

An effective, binding price floor, causing a surplus (supply exceeds demand).

In this case, the price floor has a measurable impact on the market. It ensures prices stay high so t product can continue to be made.

A historical (and current) example of a price floor are minimum wage laws; in this case, employees are the suppliers of labor and the company is the consumer. When the minimum wage is set higher than the equilibrium market price for unskilled labor, unemployment is created (more people are looking for jobs than there are jobs available). A minimum wage above the equilibrium wage would induce employers to hire fewer workers as well as allow more people to enter the labor market, the result is a surplus in the amount of labor available. The equilibrium wage for a worker would be dependent upon the worker's skill sets along with market conditions.

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