Price Floor

Price FloorsA price floor is the lowest legal price a commodity can be sold at. 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. Price floors are also used often in agriculture to try to protect farmers. For a price floor to be effective, it must be set above the equilibrium price. If it's not above equilibrium, then the market won't sell below equilibrium and the price floor will be irrelevant. Drawing a price floor is simple. Simply draw a straight, horizontal line at the price floor level. This graph shows a price floor at $3.00. You'll notice that the price floor is above the equilibrium price, which is $2.00 in this example. A few crazy things start to happen when a price floor is set. First of all, the price floor has raised the price above what it was at equilibrium, so the demanders (consumers) aren't willing to buy as much quantity. The demanders will purchase the quantity where the quantity demanded is equal to the price floor, or where the demand curve intersects the price floor line. On the other hand, since the price is higher than what it would be at equilibrium, the suppliers (producers) are willing to supply more than the equilibrium quantity. They will supply where their marginal cost is equal to the price floor, or where the supply curve intersects the price floor line. As you might have guessed, this creates a problem. There is less quantity demanded (consumed) than quantity supplied (produced). This is called a surplus. If the surplus is allowed to be in the market then the price would actually drop below the equilibrium. In order to prevent this the government must step in. The government has a few options: * 1. They can buy up all the surplus. For a while the US government bought grain surpluses in the US and then gave all the grain to Africa. This might have been nice for African consumers, but it destroyed African