A price floor is a minimum price that a buyer can offer for a good, service, or resource. If the price floor is below the equilibrium price, it will have no effect on equilibrium price and quantity. Figure 3 illustrates a price floor that is set above the equilibrium price. The result will be a surplus (excess supply) at the floor price, since the quantity supplied, Qj, exceeds the quantity demanded, Qj, at the floor price. There is a loss of efficiency (deadweight loss) because the quantity actually transacted with the pricc floor. Q j. is less than the efficient equilibrium quantity. Q .
Figure 3: Impact of a Price Floor
In the long run, price floors lead to inefficiencies:
• Suppliers will divert resources to the production of the good with the anticipation of selling the good at the floor price, but then will not be able to sell all they produce.
• Consumers will buy less of a product if the floor is above the equilibrium price and substitute other, less expensive consumption goods for the good subject to the price floor.
In the labor market, as in all markets, equilibrium occurs when the quantity demanded (of hours worked, in this case) equals the quantity supplied. In the labor market, the equilibrium price is called the wage rate. The equilibrium wage rate is different for labor of different kinds and with various levels of skill. Labor that requires the lowest skill level (unskilled labor) generally has the lowest wage rate.
In some places, including the United States, there is a minimum wage rate (sometimes defined as a "living wage") that prevents employers from hiring workers at a wage less than the legal minimum. The minimum wage is an example of a price floor. At a minimum wage above the equilibrium wage, there will be an excess supply of workers, since firms cannot employ all the workers who want to work at that wage. Since firms must pay at least the minimum wage for the workers, firms substitute other productive resources for labor and use more than the economically efficient amount of capital. The result is increased unemployment because even when there arc workers willing to work at a wage lower than the minimum, firms cannot legally hire them. Furthermore, firms may decrca.se the quality or quantity of the nonmonetary benefits they previously offered to workers, such as pleasant, sate working conditions and on-the-job training.
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