Price floor: Difference between revisions
(Created page with '==Definition== A '''price floor''' or '''minimum price''' is a lower limit placed by a government or regulatory authority on the price (per unit) of a commodity. A price floor …') |
|||
| Line 13: | Line 13: | ||
===Price floors set above the market price cause excess supply=== | ===Price floors set above the market price cause excess supply=== | ||
A price floor set above the market price causes [[excess supply]], or a surplus, of the good, because suppliers, tempted by the higher prices, increase production, while buyers, put off by the high prices, decide to buy less. The situation may be resolved by means of a [[black market]], where the goods are sold for less than the price floor (typically, though, black markets are used to handle shortages or scarcity due to [[price ceiling]]s). | A price floor set above the market price causes [[excess supply]], or a surplus, of the good, because suppliers, tempted by the higher prices, increase production, while buyers, put off by the high prices, decide to buy less. This leads to a [[deadweight loss]] in the form of a [[Harberger's triangle]], so named because the loss can be quantified as the area of a triangle whose sides are segments of the [[demand curve]], [[supply curve]], and horizontal line for the price floor. | ||
The situation may be resolved by means of a [[black market]], where the goods are sold for less than the price floor (typically, though, black markets are used to handle shortages or scarcity due to [[price ceiling]]s). | |||
Revision as of 22:53, 14 November 2009
Definition
A price floor or minimum price is a lower limit placed by a government or regulatory authority on the price (per unit) of a commodity.
A price floor is a form of price control. Another form of price control is a price ceiling.
Effects of price floors
Price floors set below the market price have no effect
If the price floor is set below the market price, it has no effect on the market price.
Price floors set above the market price cause excess supply
A price floor set above the market price causes excess supply, or a surplus, of the good, because suppliers, tempted by the higher prices, increase production, while buyers, put off by the high prices, decide to buy less. This leads to a deadweight loss in the form of a Harberger's triangle, so named because the loss can be quantified as the area of a triangle whose sides are segments of the demand curve, supply curve, and horizontal line for the price floor.
The situation may be resolved by means of a black market, where the goods are sold for less than the price floor (typically, though, black markets are used to handle shortages or scarcity due to price ceilings).