An Effective Price Floor Must Be Set

A price floor must be higher than the equilibrium price in order to be effective.

An effective price floor must be set. For a price floor to be effective it must be set above the equilibrium price. Government enforce price floor to oblige consumer to pay certain minimum amount to the producers. Price floor is enforced with an only intention of assisting producers. 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 influences the equilibrium values of economic variables will not change often described as the.

Trading at a lower price is illegal. In the diagram above the minimum price p2 is below the equilibrium price at p1. However price floor has some adverse effects on the market. For a price floor to be effective it must be set above the equilibrium price.

If it s not above equilibrium then the market won t sell below equilibrium and the price floor will be irrelevant. A price floor is a government or group imposed price control or limit on how low a price can be charged for a product good commodity or service. What makes a price floor price ceiling binding effective. A price floor acts as a safety net accessed only if the.

Drawing a price floor is simple. If it s not above equilibrium then the market won t sell below equilibrium and the price floor will be irrelevant. Government set price floor when it believes that the producers are receiving unfair amount. Simply draw a straight horizontal line at the price floor level.