A price floor is only effective when set above the equilibrium price below left.
Quantity exchanged price floor.
A price floor is the lowest legal price a commodity can be sold at.
The intersection of demand d and supply s would be at the equilibrium point e 0.
Taxation and dead weight loss.
The quantity demanded at the price ceiling will equal the quantity supplied.
In figure 5 5 a price floor the price floor is illustrated with a horizontal line and is above the equilibrium price.
Consequently at the price floor a larger quantity is supplied than is demanded leading to a surplus.
Price floors are used by the government to prevent prices from being too low.
The most common price floor is the minimum wage the minimum price that can be payed for labor.
A price floor example.
When a price floor is set above the equilibrium price as in this example it is considered a binding price floor.
Price and quantity controls.
However a price floor set at pf holds the price above e 0 and prevents it from falling.
The result of the price floor is that the quantity supplied qs exceeds the quantity demanded qd.
At the price ceiling there is a surplus of orange juice.
Price floors are also used often in agriculture to try to protect farmers.
There are units that are socially efficient to trade but aren t traded because their value is less than the price floor.
The result is a quantity supplied in excess of the quantity demanded qd.
Taxes and perfectly inelastic demand.
The amount exchanged in the market will be limited by the smaller of the two quantities q d in this case.
When the price floor is set below the equilibrium.
Taxes and perfectly elastic demand.
Percentage tax on hamburgers.
Example breaking down tax incidence.
The quantity demanded at the price ceiling will equal the quantity.
The quantity supplied at the price ceiling will equal the quantity exchanged.
When quantity supplied exceeds quantity demanded a surplus exists.
The effect of government interventions on surplus.
