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. A surplus (Qs – Q,) 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 rationing 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 example. When it’s difficult to alter the product’s quality- in this case, improve it to make it more attractive for the price that must be charged- some producers will be unable to sell it.
It is important to note that a surplus doesn’t mean the good is no longer scarce. People still want more of the good than is freely available from nature, even though they want less of it at the controlled price than sellers want to bring to the market. A decline in price would eliminate the surplus, but the item will be scarce in either case.
Tags: Exchange rates, insurance, minimum price, price floors, real estate
No Comments
No comments. Be the first.
Sorry, the comment form is closed at this time.