Price and quantity controls.
Diagram for price floor.
But this has a flip side too.
This is shown by the diagram below.
This is the currently selected item.
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.
For a price floor to be effective it must be set above the equilibrium price.
Thus the actual equilibrium ends up below market equilibrium.
Minimum wage and price floors.
Simply draw a straight horizontal line at the price floor level.
Price floor leads to a lesser number of workers than in case of equilibrium wage.
Price ceilings and price floors.
How price controls reallocate surplus.
A few crazy things start to happen when a price floor is set.
This graph shows a price floor at 3 00.
The equilibrium price commonly called the market price is the price where economic forces such as supply and demand are balanced and in the absence of external.
Example breaking down tax incidence.
The price floor is determined at rs 4 which is good for workers who will earn more than before.
In the diagram above the minimum price p2 is below the equilibrium price at p1.
The effect of government interventions on surplus.
Another unintended consequence of a price floor comes into play in professions that are regulated and require licensing such as electricians.
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.
Service tax is a tax levied by the government on service providers on certain service transactions but is actually borne by the customers.
The price ceiling graph below shows a price ceiling in equilibrium where the government has forced the maximum price to be pmax.
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.
Taxation and dead weight loss.
A price floor is the lowest legal price that can be paid in markets for goods and services labor or financial capital.
A price ceiling is the legal maximum price for a good or service while a price floor is the legal minimum price.
A price floor must be higher than the equilibrium price in order to be effective.
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.
Equilibrium wage rate is rs.
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.
If it s not above equilibrium then the market won t sell below equilibrium and the price floor will be irrelevant.
