Diagram Price Floor

How price controls reallocate surplus.

Diagram price floor.

A price floor is the lowest legal price that can be paid in markets for goods and services labor or financial capital. In the diagram above the minimum price p2 is below the equilibrium price at p1. In this case the floor has no practical effect. Example breaking down tax incidence.

Drawing a price floor is simple. Price ceilings and price floors. You ll notice that the price floor is above the equilibrium price which is 2 00 in this example. Another unintended consequence of a price floor comes into play in professions that are regulated and require licensing such as electricians.

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. In the first graph at right the dashed green line represents a price floor set below the free market price. 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. If it s not above equilibrium then the market won t sell below equilibrium and the price floor will be irrelevant. Thus the actual equilibrium ends up below market equilibrium. Price and quantity controls.

Simply draw a straight horizontal line at the price floor level. This is shown by the diagram below. Equilibrium wage rate is rs. Service tax is a tax levied by the government on service providers on certain service transactions but is actually borne by the customers.

But this has a flip side too. Price floor leads to a lesser number of workers than in case of equilibrium wage. For a price floor to be effective it must be set above the equilibrium price. This graph shows a price floor at 3 00.

A price ceiling is the legal maximum price for a good or service while a price floor is the legal minimum price. The effect of government interventions on surplus. 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. This is the currently selected item.

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. 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. Minimum wage and price floors. A price floor could be set below the free market equilibrium price.