A price floor is a legal minimum on the price at which a
good can be sold. `A price floor can be binding or not binding. If the
equilibrium price is above the price floor, the price floor is not
binding. Market forces naturally move
the economy to the equilibrium, and the price floor has no effect. In case the
price floor is set above the equilibrium price, it is a binding constraint on
the market. The forces of supply and demand tend to move the price towards the
equilibrium price, but when the market price hits the floor, it can fall no
further. The market price equals the price floor. At this floor, the quantity
supplied exceeds the quantity demanded. Some people who want to sell the good
at the going price are unable to. Thus, a binding price floor causes a surplus. The figure below shows a binding price floor.
No comments:
Post a Comment