Diagram Price Floor

How price controls reallocate surplus.

Diagram price floor. 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. The price floor is determined at rs 4 which is good for workers who will earn more than before. A few crazy things start to happen when a price floor is set. Price floor leads to a lesser number of workers than in case of equilibrium wage.

Example breaking down tax incidence. In this case the floor has no practical effect. In the diagram above the minimum price p2 is below the equilibrium price at p1. Minimum wage and price floors.

Simply draw a straight horizontal line at the price floor level. A price ceiling is the legal maximum price for a good or service while a price floor is the legal minimum price. For a price floor to be effective it must be set above the equilibrium price. Thus the actual equilibrium ends up below market equilibrium.

Service tax is a tax levied by the government on service providers on certain service transactions but is actually borne by the customers. This is shown by the diagram below. 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. The government has mandated a minimum price but the market already bears and is using a higher price.

This graph shows a price floor at 3 00. If it s not above equilibrium then the market won t sell below equilibrium and the price floor will be irrelevant. But this has a flip side too. Taxation and dead weight loss.

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. Drawing a price floor is simple. Another unintended consequence of a price floor comes into play in professions that are regulated and require licensing such as electricians. A price floor could be set below the free market equilibrium price.

This is the currently selected item. In the first graph at right the dashed green line represents a price floor set below the free market price. A price floor is the lowest legal price that can be paid in markets for goods and services labor or financial capital. The price ceiling graph below shows a price ceiling in equilibrium where the government has forced the maximum price to be pmax.

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. Price ceilings and price floors. 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. The effect of government interventions on surplus.