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Learning outcomes:
Explain why Governments impose Price Floors, and
describe examples of Price Floors, including agricultural
products & minimum wage.
Draw a diagram of a price floor and analyze the impacts
of a price floor on market outcomes.
Examine consequences of Price Floors
Discuss the consequences of imposing a Price Floor on
stakeholders: consumers, producers and government.
Price Floor
Price Floor is a minimum legally allowed
price set by the government.
For a Price Floor to be effective it must be
set above the Market Equilibrium Price constraining.
If set above Price Equilibrium - prevents the
pricing mechanism from working effectively.
http://www.econweb.
com/MacroWelcome/sandd/Price_Floor.gif
Surplus
Producer - at higher prices
producers are willing to supply more
goods to the market.
Consumer - at higher prices
consumers will decrease the amount
of goods they purchase.
This creates a Surplus in the
Marketplace - Qs > Qd
http://www.econweb.
com/MacroWelcome/sandd/Price_Floor.gif
Market in Equilibrium
Allocatively Efficient
Market in disequilibrium
Allocatively Inefficient
Cost Inefficiency
Higher Prices create and incentive and the
ability for other higher production cost firms
to enter the marketplace. (Qe - Qs)
Considered inefficient because those
resources used by these firms now entering
the marketplace could be used elsewhere.
Allocatively Inefficient
With the introduction of a Price Floor there
becomes an overallocation of resources
to the productions of a good.
The amount the market creates is greater
than what the Consumer demands.
Market is in disequilibrium and considered
allocatively inefficient.