Further, the effect of mandating a higher price transfers some of the consumer surplus to producer surplus, while creating a deadweight loss as the price moves upward from the equilibrium price. The equilibrium price is determined when the quantity demanded is equal to the quantity supplied. Taken together, these effects mean there is now an excess supply (known as a "surplus") of the product in the market to maintain the price floor over the long term. Meanwhile, suppliers find they are guaranteed a new, higher price than they were charging before, but with fewer willing buyers. As a result, they reduce their purchases, switch to substitutes (e.g., from butter to margarine) or drop out of the market entirely. Consumers find they must now pay a higher price for the same product. It ensures prices stay high, causing a surplus in the market.Ī price floor set above the market equilibrium price has several side-effects.
In this case, the price floor has a measurable impact on the market. A related government- or group-imposed intervention, which is also a price control, is the price ceiling it sets the maximum price that can legally be charged for a good or service, with a common government-imposed example being rent control.Īn effective, binding price floor, causing a surplus (supply exceeds demand).īy contrast, in the second graph, the dashed green line represents a price floor set above the free-market price. With resale price maintenance, a manufacturer and its distributors agree that the distributors will sell the manufacturer's product at certain prices (resale price maintenance), at or above a price floor (minimum resale price maintenance) or at or below a price ceiling (maximum resale price maintenance). While price floors are often imposed by governments, there are also price floors which are implemented by non-governmental organizations such as companies, such as the practice of resale price maintenance. Other price floors include regulated US airfares prior to 1978 and minimum price per-drink laws for alcohol. Two common price floors are minimum wage laws and supply management in Canadian agriculture. Governments use price floors to keep certain prices from going too low.
The equilibrium price, commonly called the "market price", is the price where economic forces such as supply and demand are balanced and in the absence of external influences the (equilibrium) values of economic variables will not change, often described as the point at which quantity demanded and quantity supplied are equal (in a perfectly competitive market). A price floor must be higher than the equilibrium price in order to be effective. A government-set minimum wage is a price floor on the price of labour.Ī price floor is a government- or group-imposed price control or limit on how low a price can be charged for a product, good, commodity, or service. Protesters call for an increased legal minimum wage as part of the "Fight for $15" effort to require a $15 per hour minimum wage in 2015.