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Price Floor

Price Floor. This is another example of government intervention in a market. price floor. The downward arrow is here to suggest price can not get below Pf. P. S1.

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Price Floor

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  1. Price Floor This is another example of government intervention in a market.

  2. price floor The downward arrow is here to suggest price can not get below Pf. P S1 A price floor is a minimum legal price. The government enacts one when it is felt the market price is too low. So an effective legal minimum must be above the equilibrium price so price can not get down to P1. Pf a b c d e P1 D1 Q Qs Qd Q1

  3. price floor With the price floor we see: 1) higher price Pf, 2) lower quantity demanded - from Q1 to Qd. This is really also the amount traded. The amount traded has fallen because sellers can only sell what buyers buy. 3) Higher quantity supplied - Q1 to Qs. 4) surplus = Qs - Qd.

  4. One thing we notice with the floor is a surplus is created. What happens to the goods that are made and not purchased? Maybe the government will buy them – the government would have to pay (Qs – Qd)times Pf to buy the surplus. Maybe the government will ask producers not to make them.

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