Price Floors

Unit 4.3 - Government Intervention

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.

Price Floor Graph

When the price is set above
the equilibrium price the
minimum price creates:
1. Surplus - Qs(40) > Qd(20)
2. Reduced market size
3. Cost inefficiency
4. Allocative inefficiency
5. Informal (Black) Markets

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

Reduced Market Size

Due to the decrease in
the Qd or amount
purchased by consumers,
the market size is
reduced.

Market in Equilibrium
Allocatively Efficient

Market in disequilibrium
Allocatively Inefficient

The amount of Consumer

and Producer Surplus
decreases.
http://2012books.lardbucket.org/books/theory-and-applications-ofeconomics/section_16/289622c0b96fdb7c71793249f027df10.jpg

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.

Informal (Black) Markets

Due to the surplus of goods on the market,
firms may choose to sell their goods at a price
below the government set price.
This is considered illegal.

Examples of Price Floors

Agricultural Price Supports to help farmers
out.
Minimum Wage for workers
Watch the videos on Weebly to better
understand the consequences of Price Floors

Stakeholders Agricultural Consumers

Consumers Consumers are worse off, as
they must now pay a higher price for the
good while they buy a smaller quantity of it.
This is clear also from their loss of some
consumer surplus.

Consequences Agricultural - Producers

Producers gain as they receive a higher price and
produce a larger quantity, and since the government
buys up the surplus, they increase their revenues
(agricultural price controls).
Producers become protected against low-cost
competition and do not face as strong incentives to
become efficient producers.

Consequences Agricultural - workers

Workers are likely to gain as employment
increases on account of greater production of
the good. (Tragakes)

Consequences Agricultural - Government

When the government buys the excess
supply, this is a burden on its budget.
The costs to the government are paid for out of taxes
(and therefore by taxpayers).
Opportunity Cost - Results in less government funds
to spend on other desirable activities in the economy.
Additionally there are further costs of storing the surplus
or subsidising it for export.