Price Floor Creates Shortage Or Surplus

Surplus or excess supply.

Price floor creates shortage or surplus.

Price floors prevent a price from falling below a certain level. When government laws regulate prices instead of letting market forces determine prices it is known as price control. We call a surplus caused by the minimum wage unemployment. In case of producer surplus producers would have reduced the price to increase consumers demands and clear off the stock.

Surplus product is just one visible effect of a price floor. Let s consider one scenario in which the amount that producers want to sell doesn t match the amount that consumers want to buy. Some suppliers that could not compete at a. Incentives built into the structure of demand and supply will create pressures for the price to rise.

But since it is illegal to do so producers cannot do anything. 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. Unfortunately it like any price floor creates a surplus. A price floor is the lowest legal price a commodity can be sold at.

The most common price floor is the minimum wage the minimum price that can be payed for labor. So government has to intervene and buy the surplus inventories. Setting a binding price floor creates a disequilibrium because it excludes those who are only interested in purchasing the item at a lower price that the market would otherwise allow. Likewise since supply is proportional to price a price floor creates excess supply if the legal price exceeds the market price.

A price floor can cause a surplus while a price ceiling can cause a shortage but not always. In this case it is a surplus of workers suppliers of labor more of whom are willing to work in minimum wage jobs than there are employers demanders willing to hire at that wage. Price floors distort markets in a number of ways. When a price floor is set above the equilibrium price quantity supplied will exceed quantity demanded and excess supply or surpluses will result.

Price floors are also used often in agriculture to try to protect farmers. 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. For example they promote inefficiency. Price floors are used by the government to prevent prices from being too low.