Price Floor Econ Graph

In the price floor graph below the government establishes the price floor at price pmin which is above the market equilibrium.

Price floor econ graph.

A few crazy things start to happen when a price floor is set. Price supports sets a minimum price just like as before but here the government buys up any excess supply. When a price floor is put in place the price of a good will likely be set above equilibrium. Simply draw a straight horizontal line at the price floor level.

Price floors can also be set below equilibrium as a preventative measure in case prices are expected to decrease dramatically. Drawing a price floor is simple. The result is that the quantity supplied qs far exceeds the quantity demanded qd which leads to a surplus of the product in the market. This graph shows a price floor at 3 00.

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. A price floor is an established lower boundary on the price of a commodity in the market. Price regulations are governmental measures dictating the quantities of a commodity to be sold at a specified price both in the retail marketplace and at other stages in the production process. This is even more inefficient and costly for the government and society as a whole than the government directly subsidizing the affected firms.

They can set a simple price floor use a price support or set production quotas. These regulations act as control measures or emergency economic measures in the case of imperfect competition to prevent probable market failures.