Graph walkthrough · Micro · Supply and demand

A price floor for milk

The government sets a minimum price for milk above the market price.

QuantityPrice0DSE₀

Step 1 of 3 · Before the floor

Milk sells at 3 dollars a gallon and 40 million gallons are sold a week. The horizontal axis is millions of gallons per week. The vertical axis is the price per gallon. The market clears at E₀.

The chain in words

  1. Step 1

    Before the floor

    Milk sells at 3 dollars a gallon and 40 million gallons are sold a week. The horizontal axis is millions of gallons per week. The vertical axis is the price per gallon. The market clears at E₀.

  2. Step 2

    The floor appears

    The government sets a floor of 3.75 dollars, above the market price. No curve moves. At the floor, dairies offer more milk than shoppers buy, and the gap is a surplus.

  3. Step 3

    The surplus stays

    The price cannot fall to clear the market. Either the government buys the surplus and stores it as powder and cheese, or the extra milk goes unsold. Farmers who sell gain, shoppers pay more and buy less, and taxpayers fund the difference.

Takeaway. A binding price floor moves no curve: it holds price above equilibrium and leaves a surplus that will not clear.

Draw it yourself

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Go deeper

Lesson: Price Floors

The walkthrough shows the chain. The lesson explains why each link holds, with worked examples and practice questions that remember what you get wrong.
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