Price Floors: Government
intrusion into the Market
Chapter 6
Price Floor
Price Floors set a legal
minimum price for which a
good can be sold
They can be binding
(effective) as in this
graph…or
Non-binding price floor
Why are nonbinding price floors
non-binding?
Minimum Wage Laws are an example
of Price Floors
Agricultural Price Supports: price floor
example
Iowa State Legislature imposes a price
floor of $1.20
• Add a price ceiling of $1.20 to your graph
• Indicate: Qs, Qd, surplus
Agricultural Price Supports: price floor
example
Shade the Deadweight Loss
Minimum Wage, Agricultural price
Supports
• Classic example of Price Floor
• Illustrates problems of government intrusion
into the market
– Creates a black market
– Inefficient allocation among sellers
– Incentive to increase quality of the good/service
– Wasted resources
• test
Price Ceiling Impacts: inefficient
allocation among sellers
Price Ceiling Impacts: Black Market
Price Floor Impacts: unwanted high
quality
Price Ceiling Impacts: wasted
resources
Price Floor Impact: Dead weight loss
PC causes it, too
Markets are Usually a Good Way to
Organize Economic Activity
Assignment
• Morton work, Krugman practice
• Mankiw 116-119