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What is a Price Floor?
A price floor is a government-imposed minimum price that sellers are legally required to charge for a good or service.
Definition
A price floor is a regulatory limit that prevents prices from falling below a specified level.
Key Takeaways
- Designed to protect producers or workers from very low prices.
- Commonly applied to labor markets and agricultural products.
- Can create surpluses if set above market equilibrium.
Understanding Price Floor
Price floors are typically introduced to ensure fair income for producers or workers. When a price floor is set above the market equilibrium, the quantity supplied exceeds the quantity demanded, resulting in excess supply or surplus.
A well-known example of a price floor is a minimum wage. Governments set a minimum hourly wage to protect workers from exploitation and ensure a basic standard of living.
While price floors can achieve social objectives, they may also reduce market efficiency and create unintended consequences if poorly designed.
Real-World Example
Minimum wage laws represent a price floor in labor markets. If the minimum wage is set above the equilibrium wage, more workers may seek jobs than employers are willing to hire, potentially increasing unemployment.
Importance in Business or Economics
Price floors illustrate how government intervention affects supply-and-demand dynamics. They are central to discussions on labor policy, agricultural subsidies, and income protection, making them a key concept in microeconomics and public policy.
Types or Variations
Minimum Wage: A labor market price floor.
Agricultural Price Supports: Guaranteed minimum prices for farm products.
Import Price Floors: Minimum prices applied to imported goods.
Related Terms
- Price Ceiling
- Market Equilibrium
- Minimum Wage
Sources and Further Reading
- Investopedia — Price Floor
- Khan Academy — Price Floors and Ceilings
- OECD — Price Controls and Economic Policy
Quick Reference
- Sets a legal minimum price.
- Protects producers or workers.
- Can cause surpluses when misaligned with equilibrium.
Frequently Asked Questions (FAQs)
Why do governments set price floors?
To protect income levels and prevent excessively low prices.
What happens when a price floor is too high?
Surpluses, inefficiency, and potential unemployment may occur.
Are price floors always harmful?
No. They can achieve social goals but often involve trade-offs.
