A Legal Minimum Price at Which a Good Can Be Sold Is a Price

A floor price is the lowest price you can legally charge for a good or service. Perhaps the best-known example of a floor price is the minimum wage, which is based on the idea that a person who works full-time should be able to afford a basic standard of living. The federal minimum wage in 2016 was $7.25 per hour, although some states and municipalities have a higher minimum wage. The federal minimum wage gives a single person an annual income of $15,080, which is slightly above the federal poverty line of $11,880. As the cost of living rises over time, Congress steadily raises the federal minimum wage. We have already mentioned that the minimum wage is a good example of a floor price, as employers are obliged to pay at least the minimum wage for employees. The following video provides a strong argument for why a minimum wage leads to a surplus of work, i.e. unemployment. When you see it, think about what you think of a minimum wage.

Neither price ceilings nor floor prices lead to a change in supply or demand. They simply set a price that limits what can be legally charged in the market. Remember that price changes do not result in a change in demand or supply. In other words, they do not change the balance. Price caps and price floors can lead to a different selection of the quantity demanded along a demand curve, but do not move in the demand curve. Price control may lead to a different selection of the quantity delivered along a supply curve, but does not change the supply curve. The most common way price supports labor is for the government to enter the market and buy the product, which increases demand to keep prices higher than they would otherwise be. According to the reform of the Common Agricultural Policy adopted in 2013, the European Union (EU) will spend around €60 billion per year, or $67 billion per year (at the November 2016 exchange rate), or around 38% of the EU budget, to support European farmers` prices from 2014 to 2020. Figure 2 illustrates the impact of a government program that ensures a price above equilibrium by focusing on the wheat market in Europe.

Without State intervention, the price would adjust in such a way that the quantity delivered would correspond to the quantity requested at the equilibrium point E0 with the price P0 and the quantity Q0. However, the policy of keeping prices high for farmers keeps the price above what the market equilibrium level would have been – the price Pf represented by the dotted horizontal line in the graph. The result is a quantity delivered that goes beyond the quantity (Qd) in demand. If the quantity delivered exceeds the quantity requested, a surplus is created. If a floor price is set above the equilibrium price, as in this example, it is considered a binding floor price. Economists estimate that the world`s high-income regions, including the United States, Europe and Japan, spend about $1 billion a day to support their farmers. If the government is willing to buy the oversupply (or make payments to others to buy it), farmers will benefit from the floor price, but taxpayers and food consumers will pay the cost through higher taxes and higher prices. Agricultural economists and policymakers have made many proposals to reduce agricultural subsidies. In many countries, however, political support for farmer subsidies remains strong. This is either because the public sees this as support for the traditional rural way of life, or because of the industry`s lobbying power for the farm business. Floor prices are sometimes called „price supports” because they support a price by preventing it from falling below a certain level. Around the world, many countries have passed laws to create agricultural price support.

Agricultural prices and therefore farm incomes fluctuate, sometimes strongly. Even though farm incomes are reasonable on average, they can be quite low within a few years. The purpose of price support is to prevent these fluctuations. Figure 2. European wheat prices: example of floor prices. The intersection of supply (D) and supply (S) would be at equilibrium point E0.