Price and Quantity controls: Price Floor

After exploring the concept of a price ceiling in a previous post. It is time define the term "price floor". A price floor can be thought as the opposite definition of a price ceiling, where the latter can be described as setting a maximum price that must be smaller than the current equilibrium price. The former is a minimum price that must be greater than the equilibrium price.

If a government finds the that the market equilibrium price for a good to be too low, it may impose a minimum price that is greater than the current market price. The quantity demanded is lower than the quantity supplied. The market produces more than the consumers are willing to buy at that price. This results in a surplus which can be represented by the distance between the quantity consumed and the quantity supplied at the new imposed price in the market.

Real life examples of price floors can be found in the agriculture and energy industries, or in the labor market (minimum wage). Recently, the Federal Energy Regulatory Commission imposed a price floor on the renewable power resource providers in New York's capacity market.

Example:

The government decides to put in place a minimum price on corn crops. Assuming that this market is competitive, then the new binding price (PC) causes the quantity demanded to be less than the quantity produced. This results in a surplus in the market. The amount of people willing to buy corn crops (QD) at the new given price is smaller than the amount supplied by the producers (QS). The new amount of corn crops consumed in the market is now lower than it was before the price floor (QE>QD).

Reference: Mayer,David. AP Microeconomics Crash Course. Research & Education Association (2014). p 64.

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