Before considering an example of price floors minimum wages let s examine the problem in general terms.
Price floor price ceiling surplus and shortage.
Price ceilings and price floors.
In such situations the quantity supplied of a good will exceed the quantity demanded resulting in a surplus.
The original intersection of demand and supply occurs at e 0 if demand shifts from d 0 to d 1 the new equilibrium would be at e 1 unless a price ceiling prevents the price from rising.
This is something i would explain and illustrate with students in my economics microeconomics classes.
Taxes and perfectly inelastic demand.
It is legal minimum price set by the government on particular goods and services in order to prevent producers from being paid very less price.
If the price is not permitted to rise the quantity supplied remains at 15 000.
But this is a control or limit on how low a price can be charged for any commodity.
For more on the minimum wage see 3 reasons the 15 minimum wage is a bad way to help the poor.
Like price ceiling price floor is also a measure of price control imposed by the government.
When the ceiling is set below the market price there will be excess demand or a supply shortage.
A price ceiling is designed to protect consumers from prices that are too high so to protect consumers the government sets a maximum price.
How price controls reallocate surplus.
Taxes and perfectly elastic demand.
Recall that the law of demand says that as price decreases consumers demand a higher quantity.
Likewise since supply is proportional to price a price floor creates excess supply if the legal price exceeds the market price.
Producers won t produce as much at the lower price while consumers will demand more because the goods are cheaper.
Similarly the law of supply says that when price decreases producers supply a lower quantity.
In order to understand market equilibrium we need to start with the laws of demand and supply.
Taxation and deadweight loss.
Price ceilings only become a problem when they are set below the market equilibrium price.
Governments usually set up a price floor in order to ensure that the market price of a commodity does not fall below a level that would threaten the financial existence of producers of the commodity.
Like price ceilings price floors disrupt market cooperation and have consequences quite different from those advertised by their advocates.
Price ceilings and price floors.
A price ceiling below the market price creates a shortage causing consumers to compete vigorously for the limited supply limited because the quantity supplied declines with price.
If a good faces inelastic demand a price ceiling will lower the.
Price floors and ceilings are inherently inefficient and lead to sub optimal consumer and producer surpluses but are nonetheless necessary for certain situations.
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