Economics
Price Floors
Price floors are government-imposed limits on how low a price can be set for a particular good or service. They are designed to protect producers by ensuring they receive a minimum price for their products. When a price floor is set above the equilibrium price, it can lead to surpluses as the quantity supplied exceeds the quantity demanded.
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eBook - ePub- Neva Goodwin, Jonathan M. Harris, Julie A. Nelson, Pratistha Joshi Rajkarnikar, Brian Roach, Mariano Torras(Authors)
- 2022(Publication Date)
- Routledge(Publisher)
But in other cases, especially where the elasticity of supply is high, price controls can be disastrous. One example is in Zimbabwe, where extensive price controls were imposed in 2007 with the goal of keeping prices for food and other essential goods low. As our example leads us to expect, the result of enforced low prices was to destroy the incentive for farmers and other suppliers to produce, leading to severe shortages. So, the poor people whom the policy was supposed to help were instead hurt by the unavailability of food and other basic goods. Meanwhile, farmers and other merchants were forced into bankruptcy. The price controls had to be abandoned after they forced the economy into virtual collapse.4.3 Price Floors
Governments also sometimes intervene in markets with the opposite goal—to keep prices from falling to the market equilibrium. A price set above the market price is called a price floor or “price support” (because it establishes a minimum allowable price).price floor: a regulation that specifies a minimum price for a particular productWhy would governments want to keep prices at higher levels? The obvious reason is to aid producers. Governments commonly specify minimum prices for agricultural products such as grain or milk. The goal is to help farmers, who often have considerable political influence. Of course, this also pushes up prices to consumers.The economic effect is the opposite of a price ceiling. Rather than creating a shortage, Price Floors tend to create a surplus, as producers increase their output to take advantage of profitable higher prices. But these higher prices cause consumers to cut back their purchases. In some cases, the government will buy up the surplus created by the price floor. From an economic point of view, this is clearly inefficient, because it encourages excess production and involves both higher prices to consumers and large government expenditures. Generally, economists would recommend a more efficient approach of giving direct aid to farmers, if this were considered necessary, but leaving market prices alone.Another classic example of a price floor is the minimum wage. Most governments have minimum wage laws specifying that hourly wages must be at least a given level. The United States has a federal minimum wage of $7.25 per hour (as of 2022), although about 30 states have set higher minimum wage rates. Most other developed countries have higher minimum wage rates. For example, the minimum wage is equivalent to about $10 per hour in Canada, about $11 per hour in France, and $15 per hour in Australia.6
eBook - PDFMicroeconomics
Private and Public Choice
- James Gwartney, Richard Stroup, Russell Sobel, David Macpherson(Authors)
- 2017(Publication Date)
- Cengage Learning EMEA(Publisher)
4-2c THE IMPACT OF Price Floors A price floor establishes a minimum price that can legally be charged. The government imposes Price Floors on some agricultural products, for example, in an effort to artificially increase the prices that farmers receive. When a price floor is imposed above the current market equilibrium price, it will alter the market’s operation. Exhibit 3 illustrates the Price floor A legally established minimum price buyers must pay for a good or resource. Rent controls lead to short- ages, poor maintenance, and deterioration in the quality of rental housing. Denis Tangney Jr/Photodisc/Jupiter Images 3 Assar Lindbeck, The Political Economy of the New Left (New York: Harper & Row, 1972), 39. Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-300 CHAPTER 4 DEMAND AND SUPPLY: APPLICATIONS AND EXTENSIONS 75 impact of imposing a price floor (P 1 ) for a product above its equilibrium level (P 0 ). At the higher price, the quantity supplied by producers increases along the supply curve to Q S , while the quantity demanded by consumers decreases along the demand curve to Q D . A surplus (Q S H11546 Q D ) of the good will result, as the quantity supplied by producers exceeds the quantity demanded by consumers at the new controlled price. Just like a price ceiling, a price floor reduces the quantity of the good exchanged and reduces the gains from trade. As in the case of the price ceiling, nonprice factors will play a larger role in the ration- ing process. But because there is a surplus rather than a shortage, this time buyers will be in a position to be more selective. Buyers will purchase from sellers willing to offer them nonprice favors—better service, discounts on other products, or easier credit terms, for ex- ample.
eBook - ePubFoundations of Economics
A Christian View
- Ritenour(Author)
- 2010(Publication Date)
- Wipf and Stock(Publisher)
As the name implies, a price floor is a minimum legal price. Just as a ceiling constrains how high something can go, the floor constrains how low it can go. If you were to take this book and throw it down as hard and as far as it could go, the floor stops it from going any lower. A price floor is the lowest price that buyers can legally pay and that sellers can legally receive. Just as there are effective and ineffective price ceilings, there are effective and ineffective Price Floors. An effective price floor affects the price actually paid and received on the market. As can be seen from the graph in figure 15.4, a price floor will be effective if it is greater than the market price. Figure 15.4. An effective price floor is a minimum legal price fixed above the market price. It always results in a surplus. In this case, the price floor P F is above the market price P Mkt. The graph shows us that such a price floor will indeed have a noticeable effect. The immediate effect of such a price floor is a surplus. The demand and supply curves tell us that at the price floor the quantity of the good demanded is Q D and the quantity of the good supplied is Q S. At the floor, the quantity supplied is greater than the quantity demanded. This results in excess supply. In a free market, there is no need to worry about such a state of affairs because it never lasts long. Excess supply results in frustrated sellers, to be sure, because some suppliers who are willing to sell at the price floor but cannot because there is not enough demand. Consequently, in an effort to ensure that they are the ones who actually do get to sell, the more eager sellers will bid down the price. As the price falls, the less eager sellers leave the market. At the same time the lower price increases the quantity of the good demanded. The more eager sellers will continue to bid down the price until everyone who wants to sell can sell
eBook - PDF- David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
3.4 Price Ceilings and Price Floors Price ceilings prevent a price from rising above a certain level. When a price ceiling is set below the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or shortages will result. Price Floors prevent a price from falling below a certain level. When a price floor is set above the equilibrium price, quantity supplied will exceed quantity demanded, and excess supply or surpluses will result. Price Floors and price ceilings often lead to unintended consequences. 3 • Key Concepts and Summary 79 3.5 Demand, Supply, and Efficiency Consumer surplus is the gap between the price that consumers are willing to pay, based on their preferences, and the market equilibrium price. Producer surplus is the gap between the price for which producers are willing to sell a product, based on their costs, and the market equilibrium price. Social surplus is the sum of consumer surplus and producer surplus. Total surplus is larger at the equilibrium quantity and price than it will be at any other quantity and price. Deadweight loss is loss in total surplus that occurs when the economy produces at an inefficient quantity. Self-Check Questions 1. Review Figure 3.4. Suppose the price of gasoline is $1.60 per gallon. Is the quantity demanded higher or lower than at the equilibrium price of $1.40 per gallon? What about the quantity supplied? Is there a shortage or a surplus in the market? If so, how much? 2. Why do economists use the ceteris paribus assumption? 3. In an analysis of the market for paint, an economist discovers the facts listed below. State whether each of these changes will affect supply or demand, and in what direction. a. There have recently been some important cost-saving inventions in the technology for making paint. b. Paint is lasting longer, so that property owners need not repaint as often. c. Because of severe hailstorms, many people need to repaint now.
eBook - PDF- Irvin B. Tucker, Irvin Tucker(Authors)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
In other markets, the government ’ s goal is to intervene and maintain a price higher than the equilibrium price. Market supply and demand anal-ysis is a valuable tool for understanding what happens when the government fixes prices. There are two types of price controls: price ceilings and Price Floors . EXHIBIT 3 Effect of Shifts in Demand or Supply on Market Equilibrium Change Effect on equilibrium price Effect on equilibrium quantity Demand increases Increases Increases Demand decreases Decreases Decreases Supply increases Decreases Increases Supply decreases Increases Decreases CHAPTER 4 | Markets in Action 103 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 4-2a PRICE CEILINGS Case 1: Rent Controls What happens if the government prevents the price system from setting a market price “ too high ” by mandating a price ceiling ? A price ceiling is a legally established maximum price a seller can charge. Rent controls are an example of the imposition of a price ceiling in the market for rental units. New York City, Washington, D.C., Los Angeles, San Francisco, and other communities in the United States have some form of rent control. Since World War I, rent controls have been widely used in Europe. The rationale for rent controls is to provide an “ essential service ” that would otherwise be unaffordable by many people at the equilibrium rental price. Let ’ s see why most economists believe that rent controls are counterproductive. Exhibit 5 is a supply and demand diagram for the quantity of rental units demanded and supplied per month in a hypothetical city.
eBook - PDF- James D Gwartney, Richard Stroup, J. R. Clark(Authors)
- 2014(Publication Date)
- Academic Press(Publisher)
This means, of course, that almost everything is scarce. Shortages, on the other hand, are avoidable if prices are permitted to rise. A higher, unfixed price (P 0 rather than P { in Exhibit 10a) would (a) stimulate additional production, (b) discourage consumption, and (c) ration the available supply to those willing to give up the most in exchange, that is, to pay the highest prices. These forces, an expansion in output and a reduction in consumption, would eliminate the shortage. Exhibit 10b illustrates the case of a price floor, which fixes the price of a good or resource above its equilibrium level. At the higher price, sellers will want to bring a larger amount to the market, while buyers will choose to buy less of the good. A surplus (Q—Q ) will result. Agricultural price supports and minimum wage legislation are examples of Price Floors. Predictably, nonprice factors will 5 2 PART ONE THE ECONOMIC WAY OF THINKING EXHIBIT 10 The Impact of price ceilings and Price Floors Frame (a) illustrates the impact of a price ceiling. When price is fixed below the equilibrium level, shortages will develop. Frame (b) illustrates the effects of a price floor. If price is fixed above its equilibrium level, then a surplus will result. When ceil-ings and floors prevent prices from bringing about a market equilibrium, nonprice factors will play a more important role in the rationing process. a oe r> Price v 1—' |ceiling Shortage | Surplus S / l Pi ice 7Γ floor I D Q Q Quantity/time (a) Price Ceiling Q„ On Quantity/time (b) Price Floor again play a larger role in the rationing process than would be true without a price floor. Buyers can now be more selective, since sellers want to sell more than buyers, in aggregate, desire to purchase. Buyers can be expected to seek out sellers willing to offer them favors (discounts on other products, easier credit, or better service, for example). Some sellers may be unable to market their product or service.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor(Authors)
- 2014(Publication Date)
- Openstax(Publisher)
Note that the gain to consumers is less than the loss to producers, which is just another way of seeing the deadweight loss. Figure 3.24 Efficiency and Price Floors and Ceilings (a) The original equilibrium price is $600 with a quantity of 20,000. Consumer surplus is T + U, and producer surplus is V + W + X. A price ceiling is imposed at $400, so firms in the market now produce only a quantity of 15,000. As a result, the new consumer surplus is T + V, while the new producer surplus is X. (b) The original equilibrium is $8 at a quantity of 1,800. Consumer surplus is G + H + J, and producer surplus is I + K. A price floor is imposed at $12, which means that quantity demanded falls to 1,400. As a result, the new consumer surplus is G, and the new producer surplus is H + I. Figure 3.24 (b) shows a price floor example using a string of struggling movie theaters, all in the same city. The current equilibrium is $8 per movie ticket, with 1,800 people attending movies. The original consumer surplus is G + H + J, and producer surplus is I + K. The city government is worried that movie theaters will go out of business, reducing the entertainment options available to citizens, so it decides to impose a price floor of $12 per ticket. As a result, the quantity demanded of movie tickets falls to 1,400. The new consumer surplus is G, and the new producer surplus is H + I. In effect, the price floor causes the area H to be transferred from consumer to producer surplus, but also causes a deadweight loss of J + K. This analysis shows that a price ceiling, like a law establishing rent controls, will transfer some producer surplus to consumers—which helps to explain why consumers often favor them. Conversely, a price floor like a guarantee that farmers will receive a certain price for their crops will transfer some consumer surplus to producers, which explains why producers often favor them.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
However, a price floor set at Pf holds the price above E 0 and prevents it from falling. The result of the price floor is that the quantity supplied Qs exceeds the quantity demanded Qd. There is excess supply, also called a surplus. 70 Chapter 3 | Demand and Supply This OpenStax book is available for free at http://cnx.org/content/col12170/1.7 3.5 | Demand, Supply, and Efficiency By the end of this section, you will be able to: • Contrast consumer surplus, producer surplus, and social surplus • Explain why Price Floors and price ceilings can be inefficient • Analyze demand and supply as a social adjustment mechanism The familiar demand and supply diagram holds within it the concept of economic efficiency. One typical way that economists define efficiency is when it is impossible to improve the situation of one party without imposing a cost on another. Conversely, if a situation is inefficient, it becomes possible to benefit at least one party without imposing costs on others. Efficiency in the demand and supply model has the same basic meaning: The economy is getting as much benefit as possible from its scarce resources and all the possible gains from trade have been achieved. In other words, the optimal amount of each good and service is produced and consumed. Consumer Surplus, Producer Surplus, Social Surplus Consider a market for tablet computers, as Figure 3.23 shows. The equilibrium price is $80 and the equilibrium quantity is 28 million. To see the benefits to consumers, look at the segment of the demand curve above the equilibrium point and to the left. This portion of the demand curve shows that at least some demanders would have been willing to pay more than $80 for a tablet. For example, point J shows that if the price were $90, 20 million tablets would be sold.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
However, a price floor set at Pf holds the price above E 0 and prevents it from falling. The result of the price floor is that the quantity supplied Qs exceeds the quantity demanded Qd. There is excess supply, also called a surplus. 70 Chapter 3 | Demand and Supply This OpenStax book is available for free at http://cnx.org/content/col12190/1.4 3.5 | Demand, Supply, and Efficiency By the end of this section, you will be able to: • Contrast consumer surplus, producer surplus, and social surplus • Explain why Price Floors and price ceilings can be inefficient • Analyze demand and supply as a social adjustment mechanism The familiar demand and supply diagram holds within it the concept of economic efficiency. One typical way that economists define efficiency is when it is impossible to improve the situation of one party without imposing a cost on another. Conversely, if a situation is inefficient, it becomes possible to benefit at least one party without imposing costs on others. Efficiency in the demand and supply model has the same basic meaning: The economy is getting as much benefit as possible from its scarce resources and all the possible gains from trade have been achieved. In other words, the optimal amount of each good and service is produced and consumed. Consumer Surplus, Producer Surplus, Social Surplus Consider a market for tablet computers, as Figure 3.23 shows. The equilibrium price is $80 and the equilibrium quantity is 28 million. To see the benefits to consumers, look at the segment of the demand curve above the equilibrium point and to the left. This portion of the demand curve shows that at least some demanders would have been willing to pay more than $80 for a tablet. For example, point J shows that if the price were $90, 20 million tablets would be sold.
- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
However, a price floor set at Pf holds the price above E 0 and prevents it from falling. The result of the price floor is that the quantity supplied Qs exceeds the quantity demanded Qd. There is excess supply, also called a surplus. 70 Chapter 3 | Demand and Supply This OpenStax book is available for free at http://cnx.org/content/col23729/1.3 3.5 | Demand, Supply, and Efficiency By the end of this section, you will be able to: • Contrast consumer surplus, producer surplus, and social surplus • Explain why Price Floors and price ceilings can be inefficient • Analyze demand and supply as a social adjustment mechanism The familiar demand and supply diagram holds within it the concept of economic efficiency. One typical way that economists define efficiency is when it is impossible to improve the situation of one party without imposing a cost on another. Conversely, if a situation is inefficient, it becomes possible to benefit at least one party without imposing costs on others. Efficiency in the demand and supply model has the same basic meaning: The economy is getting as much benefit as possible from its scarce resources and all the possible gains from trade have been achieved. In other words, the optimal amount of each good and service is produced and consumed. Consumer Surplus, Producer Surplus, Social Surplus Consider a market for tablet computers, as Figure 3.23 shows. The equilibrium price is $80 and the equilibrium quantity is 28 million. To see the benefits to consumers, look at the segment of the demand curve above the equilibrium point and to the left. This portion of the demand curve shows that at least some demanders would have been willing to pay more than $80 for a tablet. For example, point J shows that if the price were $90, 20 million tablets would be sold.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
However, a price floor set at Pf holds the price above E 0 and prevents it from falling. The result of the price floor is that the quantity supplied Qs exceeds the quantity demanded Qd. There is excess supply, also called a surplus. 70 Chapter 3 | Demand and Supply This OpenStax book is available for free at http://cnx.org/content/col12122/1.4 3.5 | Demand, Supply, and Efficiency By the end of this section, you will be able to: • Contrast consumer surplus, producer surplus, and social surplus • Explain why Price Floors and price ceilings can be inefficient • Analyze demand and supply as a social adjustment mechanism The familiar demand and supply diagram holds within it the concept of economic efficiency. One typical way that economists define efficiency is when it is impossible to improve the situation of one party without imposing a cost on another. Conversely, if a situation is inefficient, it becomes possible to benefit at least one party without imposing costs on others. Efficiency in the demand and supply model has the same basic meaning: The economy is getting as much benefit as possible from its scarce resources and all the possible gains from trade have been achieved. In other words, the optimal amount of each good and service is produced and consumed. Consumer Surplus, Producer Surplus, Social Surplus Consider a market for tablet computers, as Figure 3.23 shows. The equilibrium price is $80 and the equilibrium quantity is 28 million. To see the benefits to consumers, look at the segment of the demand curve above the equilibrium point and to the left. This portion of the demand curve shows that at least some demanders would have been willing to pay more than $80 for a tablet. For example, point J shows that if the price were $90, 20 million tablets would be sold.
eBook - ePub- Donald Hirsch, Laura Valadez-Martinez(Authors)
- 2017(Publication Date)
- Agenda Publishing(Publisher)
This chapter considers the effect of wage floors on the labour market. “Wage floor” is here taken to mean any minimum pay rate that is agreed or enforced outside the context of market bargaining. Evidence of the effect of wage floors is most clear-cut where a minimum wage is imposed by law, and much of the evidence relates to minimum wages set as statutory requirements within particular countries or regions. A living wage adopted voluntarily by employers on the basis that it is right to pay enough for people to live on can also be regarded as a wage floor that overrides market bargaining. However, its impact can be harder to measure, partly because the decision by employers about whether to adopt a voluntary living wage is bound to be influenced by whether they think it is affordable. Nevertheless, those putting pressure on employers or governments to put any kind of “artificial” floor on wages need to consider the overall potential impact on the labour market of not allowing the market wage to prevail. This explains why much of this chapter looks at evidence on minimum wages rather than living wages, yet why such evidence is crucial for the subject of this book. Indeed, it could be argued that current efforts in the United States (from where much of this evidence derives) to restore minimum wages to more adequate levels after years of decline in their value represents a revival of Franklin D. Roosevelt’s mission to make a minimum wage a living wage.The chapter starts by summarizing theoretical arguments and counterarguments about the potential adverse effect of wage floors on labour markets. It then considers what recent evidence has shown about, firstly, the effect on employment, and next on wider effects on employer and employee behaviour. The chapter concludes by reflecting on which consequences of setting wage floors are considered acceptable and unacceptable, by whom and why.Free markets and market imperfections: economic arguments against and for minimum wages
The textbook model of supply and demandNeoclassical economics suggests that as long as markets are allowed to operate freely, resources will be deployed most efficiently through the interaction of supply and demand to determine market prices. In the case of labour, Figures 3.1–3.4 present the basic textbook model, showing what happens if an enforced wage floor overrides the negotiated market price.In the basic economic model, buyers will usually “demand” (be willing to purchase) more of something the lower the price they can get it at; conversely, sellers will supply more of it the higher the price they can sell it for. These opposite relationships will produce an “equilibrium price” at which the demand and supply lines intersect: buyers are willing to purchase the same amount as suppliers wish to sell. This is also described as the “market clearing” price, since everybody wishing to buy or sell at this price can do so.In the case of labour markets, if wages are initially lower than the market rate shown in Figure 3.3, some buyers/employers will be short of labour and be willing to bid the price up in order to secure workers from their competitors. If wages are too high, fewer jobs will be made available than workers want, so some will be willing to accept work at a lower wage, rather than be unemployed, and so bid down wages. Adjustments of this type occur until the equilibrium is reached.
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