the imposition of a binding price floor on a market

This means that the suppliers that are able to sell their goods are better off while those who can't sell theirs (because of lack of demand) will be worse off. They can strictly enforce the price floor and let the surplus go to waste. This might have been nice for African consumers, but it destroyed African farmers.

For a while the US government bought grain surpluses in the US and then gave all the grain to Africa. In order to prevent this the government must step in. If the surplus is allowed to be in the market then the price would actually drop below the equilibrium. There is less quantity demanded (consumed) than quantity supplied (produced). They will supply where their marginal cost is equal to the price floor, or where the supply curve intersects the price floor line.Īs you might have guessed, this creates a problem. On the other hand, since the price is higher than what it would be at equilibrium, the suppliers (producers) are willing to supply more than the equilibrium quantity. The demanders will purchase the quantity where the quantity demanded is equal to the price floor, or where the demand curve intersects the price floor line. First of all, the price floor has raised the price above what it was at equilibrium, so the demanders (consumers) aren't willing to buy as much quantity. You'll notice that the price floor is above the equilibrium price, which is $2.00 in this example.Ī few crazy things start to happen when a price floor is set. Simply draw a straight, horizontal line at the price floor level. If it's not above equilibrium, then the market won't sell below equilibrium and the price floor will be irrelevant.ĭrawing a price floor is simple. Price floors are also used often in agriculture to try to protect farmers.įor a price floor to be effective, it must be set above the equilibrium price. The most common price floor is the minimum wage-the minimum price that can be payed for labor. Price floors are used by the government to prevent prices from being too low. A price floor is the lowest legal price a commodity can be sold at.

The imposition of a binding price floor on a market