price floor

floor below which prices are not allowed to fall. the government used price supports to maintain the price floor

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.By contrast, 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.

example of a price floor are minimum wage laws. 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. 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.

Comment Stream