Diagram For Price Floor

A price ceiling is the legal maximum price for a good or service while a price floor is the legal minimum price.

Diagram for price floor.

How price controls reallocate surplus. For a price floor to be effective it must be set above the equilibrium price. 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. 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.

Service tax is a tax levied by the government on service providers on certain service transactions but is actually borne by the customers. A price floor must be higher than the equilibrium price in order to be effective. Another unintended consequence of a price floor comes into play in professions that are regulated and require licensing such as electricians. Price floor leads to a lesser number of workers than in case of equilibrium wage.

The price ceiling graph below shows a price ceiling in equilibrium where the government has forced the maximum price to be pmax. Taxation and dead weight loss. A few crazy things start to happen when a price floor is set. This graph shows a price floor at 3 00.

Price and quantity controls. Simply draw a straight horizontal line at the price floor level. But this has a flip side too. Equilibrium wage rate is rs.

You ll notice that the price floor is above the equilibrium price which is 2 00 in this example. Thus the actual equilibrium ends up below market equilibrium. Drawing a price floor is simple. Example breaking down tax incidence.

A price floor is the lowest legal price that can be paid in markets for goods and services labor or financial capital. 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. 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.

A price floor is a government or group imposed price control or limit on how low a price can be charged for a product good commodity or service. If it s not above equilibrium then the market won t sell below equilibrium and the price floor will be irrelevant. The price floor is determined at rs 4 which is good for workers who will earn more than before. This is the currently selected item.

Minimum wage and price floors. The effect of government interventions on surplus. In the diagram above the minimum price p2 is below the equilibrium price at p1.