Diagram Price Floor

Equilibrium wage rate is rs.

Diagram price floor.

The government has mandated a minimum price but the market already bears and is using a higher price. Price floor is a situation when the price charged is more than or less than the equilibrium price determined by market forces of demand and supply. For a price floor to be effective it must be set above the equilibrium price. The effect of government interventions on surplus.

Drawing a price floor is simple. In this case the floor has no practical effect. In the first graph at right the dashed green line represents a price floor set below the free market price. Another unintended consequence of a price floor comes into play in professions that are regulated and require licensing such as electricians.

In the diagram above the minimum price p2 is below the equilibrium price at p1. Thus the actual equilibrium ends up below market equilibrium. A price floor is the lowest legal price that can be paid in markets for goods and services labor or financial capital. A price floor can lead to inefficient allocation of sales among sellers and selling high quality goods at a high price when a lower quality item at a lower price would do.

The price ceiling graph below shows a price ceiling in equilibrium where the government has forced the maximum price to be pmax. Example breaking down tax incidence. Taxation and dead weight loss. Perhaps the best known example of a price floor is the minimum wage which is based on the normative view that someone working full time ought to be able to afford a basic standard of living.

The price floor is determined at rs 4 which is good for workers who will earn more than before. Minimum wage and price floors. Price ceilings and price floors. National and local governments sometimes implement price controls legal minimum or maximum prices for specific goods or services to attempt managing the economy by direct intervention price controls can be price ceilings or price floors.

The original price is p but with the price ceiling the price falls to pmax and the quantity supplied is qs and the quantity demanded is qd. But this has a flip side too. This is the currently selected item. A price floor could be set below the free market equilibrium price.

A price ceiling is the legal maximum price for a good or service while a price floor is the legal minimum price. You ll notice that the price floor is above the equilibrium price which is 2 00 in this example. Simply draw a straight horizontal line at the price floor level. This is shown by the diagram below.

If it s not above equilibrium then the market won t sell below equilibrium and the price floor will be irrelevant. How price controls reallocate surplus. Price and quantity controls. Price floor leads to a lesser number of workers than in case of equilibrium wage.