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A Price floor is a government-imposed limit on how low a price can be charged for a product. For a price floor to be effective, it must be greater than the equilibrium price. In the graph at right, the supply and demand curves intersect to determine the free-market quantity and price. File links The following pages link to this file: Price ceiling Price floor User:Feco Categories: GFDL images | Graphs (images) ...
A price floor can be set above or below the free-market equilibrium price. In the graph at right, the dashed line represents a price floor set below the free-market price. In this case, the floor has no practical effect. The government has mandated a minimum price, but the market already bears a higher price. Image File history File links Basic_price_floor. ...
In contrast, the solid green line is a price floor set above the free-market price. In this case, the price floor has a measurable impact on the market.
A price floor set above the free-market price has several effects. Demanders find they must now pay a higher price for the same product. As a result, they reduce their purchases or drop out of the market entirely. Meanwhile, suppliers find they are guaranteed a new, higher price than they were charging before. As a result, they increase production.
Taken together, these effects mean there is now an excess supply of the product in the market. In order to maintain the price floor over the long term, the government must take action to remove that supply. Image File history File links Price_floor_eqm. ...
Price floors favor suppliers. A historical (and current) example of a price floor are minimum wage laws, laws specifying the lowest wage a company can pay an employee (employees are suppliers of labor and the company is the consumer in this case). When there is a minimum wage law, a surplus of labor is created (more people are looking for jobs than can find jobs). With this price floor, those who can find jobs, win (they were being paid a smaller wage, and now they get a higher wage), but there is also an increase in unemployment. Because the supply of labor tends to be relatively inelastic, the sum of total wages paid to all workers usually raises if a price floor is set even if fewer people are being employed. Still there remains an excess supply (of labor) that the government must deal with. The most direct way of doing that is for the government to simply buy the excess supply - which, in the case of labor, means creating more jobs in the public sector (for example by starting new public projects, such as building roads or schools) and hiring people to do those jobs. In addition, there are also a number of macroeconomic policies that can reduce unemployment. The minimum wage is the minimum rate a worker can legally be paid (usually per hour) as opposed to wages that are determined by the forces of supply and demand in a free market. ...
Surplus means the quantity left over, after conducting an activity; the quantity which has not been used up, and can refer to: budget surplus, the opposite of a budget deficit economic surplus Surplus product or surplus value in Marxian economics physical surplus in the economic theory of Piero Sraffa Operating...
An 1837 political cartoon about unemployment in the United States. ...
In economics, the price elasticity of supply measures the responsiveness of the quantity supplied of a good to its price. ...
< [[[[math>Insert formula here</math>The public sector is that part of economic and administrative life that deals with the delivery of goods and services by and for the [[government </math></math></math></math> Direct administration funded through taxation; the delivering organisation generally has no specific requirement to meet commercial...
Macroeconomics is the economics sub-field of study that considers aggregate behavior, and the study of the sum of individual economic decisions. ...
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