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Diagram price floor.
If it s not above equilibrium then the market won t sell below equilibrium and the price floor will be irrelevant.
In the diagram above the minimum price p2 is below the equilibrium price at p1.
For a price floor to be effective it must be set above the equilibrium price.
Price ceilings and price floors.
How price controls reallocate surplus.
Simply draw a straight horizontal line at the price floor level.
You ll notice that the price floor is above the equilibrium price which is 2 00 in this example.
Perhaps the best known example of a price floor is the minimum wage which is based on the normative view that someone working full time ought to be able to afford a basic standard of living.
A price ceiling is the legal maximum price for a good or service while a price floor is the legal minimum price.
Drawing a price floor is simple.
This graph shows a price floor at 3 00.
The price ceiling graph below shows a price ceiling in equilibrium where the government has forced the maximum price to be pmax.
The price floor is determined at rs 4 which is good for workers who will earn more than before.
A price floor is the lowest legal price that can be paid in markets for goods and services labor or financial capital.
A few crazy things start to happen when a price floor is set.
Price and quantity controls.
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.
Thus the actual equilibrium ends up below market equilibrium.
A price floor could be set below the free market equilibrium price.
In this case the floor has no practical effect.
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.
Equilibrium wage rate is rs.
Taxation and dead weight loss.
Minimum wage and price floors.
The effect of government interventions on surplus.
Example breaking down tax incidence.
Another unintended consequence of a price floor comes into play in professions that are regulated and require licensing such as electricians.
This is shown by the diagram below.
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.
In the first graph at right the dashed green line represents a price floor set below the free market price.
Price floor leads to a lesser number of workers than in case of equilibrium wage.
Service tax is a tax levied by the government on service providers on certain service transactions but is actually borne by the customers.
