A Price Floor Set Below The Free Market Equilibrium

Price floor is enforced with an only intention of assisting producers.

A price floor set below the free market equilibrium.

However price floor has some adverse effects on the market. The intersection of demand d and supply s would be at the equilibrium point e 0. Drawing a price floor is simple. The result of the price floor is that the quantity supplied qs exceeds the quantity demanded qd.

Simply draw a straight horizontal line at the price floor level. A price floor could be set below the free market equilibrium price. In the first graph at right the dashed green line represents a price floor set below the free market price. D it will maximize consumer surplus.

For a price floor to be effective it must be set above the equilibrium price. In this case the floor has no practical effect. When a price floor is set above the equilibrium price quantity supplied will exceed quantity demanded and excess supply or surpluses will result. A price floor example.

B it will create a deadweight loss. However a price floor set at pf holds the price above e 0 and prevents it from falling. If it s not above equilibrium then the market won t sell below equilibrium and the price floor will be irrelevant. If price floor is less than market equilibrium price then it has no impact on the economy.

This graph shows a price floor at 3 00. If a price floor is set above the free market equilibrium price as shown where the supply and demand curves intersect the result will be a surplus of the good in the market. C it will increase the number of jobs available in the labor market. Price floors prevent a price from falling below a certain level.

Introduction to deadweight loss. It s generally applied to consumer staples. In a perfectly competitive market products are priced at the pareto optimal point. Government set price floor when it believes that the producers are receiving unfair amount.

Economics microeconomics consumer and producer surplus market interventions and international trade market interventions and deadweight loss price ceilings and price floors how does quantity demanded react to artificial constraints on price. Price floors and price ceilings often lead to unintended consequences.