Diagram Price Floor

How price controls reallocate surplus.

Diagram price floor.

Minimum wage and price floors. In this case the floor has no practical effect. In the diagram above the minimum price p2 is below the equilibrium price at p1. If it s not above equilibrium then the market won t sell below equilibrium and the price floor will be irrelevant.

Perhaps the best known example of a price floor is the minimum wage which is based on the normative view that someone working full time ought to be able to afford a basic standard of living. This is the currently selected item. This graph shows a price floor at 3 00. Simply draw a straight horizontal line at the price floor level.

Price floor leads to a lesser number of workers than in case of equilibrium wage. The price ceiling graph below shows a price ceiling in equilibrium where the government has forced the maximum price to be pmax. You ll notice that the price floor is above the equilibrium price which is 2 00 in this example. This is shown by the diagram below.

Price and quantity controls. For a price floor to be effective it must be set above the equilibrium price. National and local governments sometimes implement price controls legal minimum or maximum prices for specific goods or services to attempt managing the economy by direct intervention price controls can be price ceilings or price floors. The original price is p but with the price ceiling the price falls to pmax and the quantity supplied is qs and the quantity demanded is qd.

Service tax is a tax levied by the government on service providers on certain service transactions but is actually borne by the customers. Drawing a price floor is simple. A price floor is the lowest legal price that can be paid in markets for goods and services labor or financial capital. The effect of government interventions on surplus.

Price ceilings and price floors. A few crazy things start to happen when a price floor is set. The government has mandated a minimum price but the market already bears and is using a higher price. But this has a flip side too.

Taxation and dead weight loss. Price floor is a situation when the price charged is more than or less than the equilibrium price determined by market forces of demand and supply. Thus the actual equilibrium ends up below market equilibrium. Example breaking down tax incidence.

In the first graph at right the dashed green line represents a price floor set below the free market price. Equilibrium wage rate is rs. A price ceiling is the legal maximum price for a good or service while a price floor is the legal minimum price. A price floor could be set below the free market equilibrium price.