Price Floor

minimum price, set by the government that must
be paid for a good or service

The dashed green line represents a price floor set above the free-market price. In this case, the price floor has a measurable impact on the market. It ensures prices stay high so that product can continue to be made.

The yellow area is the “hidden” costs, the difference between the amount of cash the sellers receive, and the wealth they gain after competing. The real price is actually below the free-market price that the government thought was too low.

In order to protect its workers, many countries impose price floors in labor markets. Such a price floor is called minimum wage. They do this by passing minimum wage laws. No employer is allowed to hire a worker for an amount less than the minimum wage. As of 24 July 2009, the minimum wage in United States is $7.25 per hour. Existence of price floor in labor market contributes to unemployment.

Another example of price floor is market for agricultural products. Governments impose price floors in agriculture in order to convince farmers to keep farming a particular crop. They fear that lack of a guaranteed price might reduce the supply of a particular product drastically because farmers might switch to other crops.

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