Effective Price Floor Graph
A price floor could be set below the free market equilibrium price.
Effective price floor graph. Price ceilings and price floors. In the price floor graph below the government establishes the price floor at price pmin which is above the market equilibrium. The government has mandated a minimum price but the market already bears and is using a higher price. Price floors and price ceilings often lead to unintended consequences.
Price floors are minimum prices set by the government for certain commodities and services that it believes are being sold in an unfair market with too low of a price and thus their producers deserve some assistance. For a price floor to be effective it must be set above the equilibrium price. The result is that the quantity supplied qs far exceeds the quantity demanded qd which leads to a surplus of the product in the market. Youll notice that the price floor is above the equilibrium price which is 200 in this example.
National and local governments sometimes implement price controls which are legal minimum or maximum prices for specific goods or services in an attempt to manage the economy by direct intervention. Price floor is typically proposed to ensure good income of people involved in farming agriculture and low skilled jobs. Drawing a price floor is simple. In the first graph at right the dashed green line represents a price floor set below the free market price.
When a price floor is set above the equilibrium price quantity supplied will exceed quantity demanded and excess supply or surpluses will result. In this case the floor has no practical effect. This graph shows a price floor at 300. There are 2 types of price controls.
Price ceiling as well as price floor are both intended to protect certain groups and these protection is only possible at the price of others. Simply draw a straight horizontal line at the price floor level.
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