What is a price floor?

A price floor is a legally enforced minimum price that buyers must pay for a good or service. The minimum wage and agricultural price supports are common examples. No legal trade may happen below the floor, even if a buyer and seller would both prefer a lower price.

When is a price floor binding?

A price floor is binding only when it is set above the market equilibrium price. If it is set below the equilibrium price, the market already clears above it and the floor has no effect.

Why does a binding price floor cause a surplus?

At the floor price, the quantity sellers want to offer (quantity supplied) is larger than the quantity buyers want to purchase (quantity demanded). The price cannot fall to eliminate this gap because the law forbids it. The gap between quantity supplied and quantity demanded at that price is the surplus.

Is the minimum wage a price floor?

Yes. The minimum wage is a price floor on labor. When it is set above the equilibrium wage, the number of people who want to work at that wage (quantity of labor supplied) exceeds the number of jobs employers offer (quantity of labor demanded). In the basic model, that gap is unemployment.

Do all price floors cause surpluses?

No. A non-binding floor — one set at or below the equilibrium price — has no effect on the market. The market clears at the equilibrium price, which already satisfies the law. Only binding floors create surpluses.

Is a price floor the same as a price ceiling?

No. A price floor is a legal minimum price and is binding when set above equilibrium, producing a surplus. A price ceiling is a legal maximum price and is binding when set below equilibrium, producing a shortage. Rent control is a classic price ceiling.

Why do price floors cause surpluses?

Short answer: a binding price floor sits above the equilibrium price, so at that higher price producers want to sell more than consumers want to buy. The gap between quantity supplied and quantity demanded is the surplus.

The mechanism in four steps

Without intervention, the market clears at an equilibrium price where quantity demanded equals quantity supplied.
A binding price floor is set above that equilibrium price. By law, no one may trade below it.
At the higher, legally enforced price, producers want to sell more (higher quantity supplied) and consumers want to buy less (lower quantity demanded).
The price cannot fall to close the gap. The gap between quantity supplied and quantity demanded is the surplus.

Worked example

Suppose demand is $P = 100 - Q$ and supply is $P = 20 + Q$ . Market equilibrium is at $Q^{*} = 40$ and $P^{*} = 60$ . The government now imposes a price floor of 80 dollars.

At $P_{f} = 80$ , quantity supplied $= 80 - 20 = 60$

At $P_{f} = 80$ , quantity demanded $= 100 - 80 = 20$

Surplus = quantity supplied − quantity demanded $= 60 - 20 = 40$ units

Only 20 units trade — the quantity consumers are willing to buy at 80 dollars. Producers would happily make 60 at that price, so 40 units go unsold. The market is stuck above the price that would clear it.

Where the surplus goes

In an unregulated market, a surplus would push the price down, which would both raise quantity demanded and cut quantity supplied. A price floor prevents that adjustment. The unsold supply has to go somewhere:

Government purchases— to defend the floor, the government often buys the excess. This is the story behind farm price supports and the famous “butter mountains” and grain stockpiles.
Waste and unsold inventory — perishable goods that no buyer wants at the floor price spoil or get discarded.
Unemployment — when the floor is a minimum wage, the labor surplus shows up as workers who want a job at that wage but cannot find one.
Non-price competition — with more sellers than buyers, sellers compete on other terms, such as quality or advertising, to land the limited demand.

Common misconception

“A price floor helps producers.” Only partly. It helps the specific producers who still manage to sell at the higher price. It hurts the producers stuck with unsold goods — and it creates deadweight loss for society as a whole, because mutually beneficial trades below the floor are not allowed to happen.

Frequently asked questions

What is a price floor?: A price floor is a legally enforced minimum price that buyers must pay for a good or service. The minimum wage and agricultural price supports are common examples. No legal trade may happen below the floor, even if a buyer and seller would both prefer a lower price.
When is a price floor binding?: A price floor is binding only when it is set above the market equilibrium price. If it is set below the equilibrium price, the market already clears above it and the floor has no effect.
Why does a binding price floor cause a surplus?: At the floor price, the quantity sellers want to offer (quantity supplied) is larger than the quantity buyers want to purchase (quantity demanded). The price cannot fall to eliminate this gap because the law forbids it. The gap between quantity supplied and quantity demanded at that price is the surplus.
Is the minimum wage a price floor?: Yes. The minimum wage is a price floor on labor. When it is set above the equilibrium wage, the number of people who want to work at that wage (quantity of labor supplied) exceeds the number of jobs employers offer (quantity of labor demanded). In the basic model, that gap is unemployment.
Do all price floors cause surpluses?: No. A non-binding floor — one set at or below the equilibrium price — has no effect on the market. The market clears at the equilibrium price, which already satisfies the law. Only binding floors create surpluses.
Is a price floor the same as a price ceiling?: No. A price floor is a legal minimum price and is binding when set above equilibrium, producing a surplus. A price ceiling is a legal maximum price and is binding when set below equilibrium, producing a shortage. Rent control is a classic price ceiling.

See the surplus appear on an interactive graph

Drag the floor up and down on Econ Academy's price-control widget and watch the surplus grow and shrink in real time.

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Why price ceilings cause shortages →Price ceilings and floors practice →

The mechanism in four steps

Worked example

Where the surplus goes

Common misconception

Frequently asked questions

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