Price Floor

Price floor is a minimum price enforced in a market by a government or self-imposed by a group.

Price floors are effective only when they are above the equilibrium price and they lead to a situation in which there is excess supply. This is explained by the upward sloping supply curve and downward sloping demand curve. A price higher than equilibrium price means less quantity demanded and more quantity supplied.

Example

In order to protect its workers, many countries impose price floors in labor markets. Such a price floor is called minimum wage. They do this by passing minimum wage laws. No employer is allowed to hire a worker for an amount less than the minimum wage. As of 24 July 2009, the minimum wage in United States is $7.25 per hour. Existence of price floor in labor market contributes to unemployment.

Another example of price floor is market for agricultural products. Governments impose price floors in agriculture in order to convince farmers to keep farming a particular crop. They fear that lack of a guaranteed price might reduce the supply of a particular commodity drastically because farmers might switch to other crops.

Written by Obaidullah Jan