What Is A Price Floor What Problem Does It Create

The most common example of a price floor is the minimum wage.

What is a price floor what problem does it create.

But this is a control or limit on how low a price can be charged for any commodity. Governments usually set up a price floor in order to ensure that the market price of a commodity does not fall below a level that would threaten the financial existence of producers of the commodity. Price floors are used by the government to prevent prices from being 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.

Like price ceiling price floor is also a measure of price control imposed by the government. It is legal minimum price set by the government on particular goods and services in order to prevent producers from being paid very less price. A price floor must be higher than the equilibrium price in order to be effective. A price floor is an established lower boundary on the price of a commodity in the market.

For a price floor to be effective the minimum price has to be higher than the equilibrium price. Price floors are also used often in agriculture to try to protect farmers. A price floor is the lowest legal price a commodity can be sold at. For example many governments intervene by establishing price floors to ensure that farmers make enough money by guaranteeing a minimum price that their goods can be sold for.

A price floor will cause a large surplus when the demand is low and the supply is high.