Lesson preview · Price Controls
Price Floors
~6 min · Free to read
A price floor is a legal minimum price. To be binding, it must be set above the equilibrium price. The most well-known example is the minimum wage — a floor on the price of labor. Another example is agricultural price supports, where the government guarantees a minimum price for crops.
Key Term
Price Floor
A price floor is a minimum legal price. If set above equilibrium: quantity supplied quantity demanded, creating a surplus (excess supply). The quantity actually traded (buyers determine the short side). A deadweight loss results from the untransacted units.
With a minimum wage above equilibrium, more workers want to work ( of labor increases) but fewer firms want to hire ( of labor decreases). The result is a surplus of labor — unemployment. The workers who keep their jobs benefit from higher wages, but some workers who would have been employed at the lower equilibrium wage now can’t find work.
A binding price floor creates a surplus equal to the gap between quantity supplied and quantity demanded at the floor price
Worked Example
The labor market has demand and supply , where is the wage and is the number of workers (thousands). A minimum wage is set at 14 dollars. Find unemployment and DWL.
Check yourself · no marks
If the minimum wage is set below the current equilibrium wage, does it affect the market?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Practice · 1 / 4
A binding price floor creates:
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