Ineffective Price Floor

Effective price floor ineffective price floor price floor above equilibrium there will be surplus unemployment surplus unemployment q s q d effects of price floor.

Ineffective price floor.

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. This will raise the price floor line on the graph above the equilibrium price level. For example many governments intervene by establishing price floors to ensure that farmers make enough money by guaranteeing a minimum price that their goods can be sold for. The current equilibrium is 8 per movie ticket with 1 800 people attending movies.

This analysis shows that a price ceiling like a law establishing rent controls will transfer some producer surplus to consumers which helps to explain why consumers often favor them. By observation it has been found that lower price floors are ineffective. The most common example of a price floor is the minimum wage. Figure 2 b shows a price floor example using a string of struggling movie theaters all in the same city.

For a price floor to be effective the minimum price has to be higher than the equilibrium price. The original consumer surplus is g h j and producer surplus is i k. The most common price floor is the minimum wage the minimum price that can be payed for labor. The net effect of the price floor in the above activity is that the price floor causes the area h to be transferred from consumer to producer surplus but also causes a deadweight loss of j k.

Efficiency and price floors and ceilings. When the price is above the equilibrium the quantity supplied will be greater than the quantity demanded and there will be a surplus. You can now see that the equilibrium price is below the price floor so it is not possible for the equilibrium price to be attained. Price floors are used by the government to prevent prices from being too low.

A price floor is the lowest legal price a commodity can be sold at. 3 wasted labor resources 4 inefficient amount of job search price floor below equilibrium there will be no surplus unemployment it is the price at which the price ceiling is. Price ceilings and price floors can be either effective or ineffective. Price ceiling price floor effective and ineffective.

Price floors are also used often in agriculture to try to protect farmers. As you learned in the lessons above any price set above the equilibrium price is an ineffective price ceiling but is an effective. Since our original price floor of 4 00 was ineffective what happens if we increase the price floor to 10 00.