Price Floor Creates Shortage Or Surplus

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.

Price floor creates shortage or surplus.

When price floor is continued for a long time supply surplus is generated in a huge amount. Let s consider one scenario in which the amount that producers want to sell doesn t match the amount that consumers want to buy. A price floor is an established lower boundary on the price of a commodity in the market. 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.

A price floor can cause a surplus while a price ceiling can cause a shortage but not always. We call a surplus caused by the minimum wage unemployment. Incentives built into the structure of demand and supply will create pressures for the price to rise. Price floors are used by the government to prevent prices from being too low.

Price floors are also used often in agriculture to try to protect farmers. Surplus product is just one visible effect of a price floor. Some suppliers that could not compete at a. Price floors distort markets in a number of ways.

Unfortunately it like any price floor creates a surplus. 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. A surplus or a shortage. 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. For example they promote inefficiency. Likewise since supply is proportional to price a price floor creates excess supply if the legal price exceeds the market price. When government laws regulate prices instead of letting market forces determine prices it is known as price control.

The most common price floor is the minimum wage the minimum price that can be payed for labor. But since it is illegal to do so producers cannot do anything. Surplus or excess supply. In case of producer surplus producers would have reduced the price to increase consumers demands and clear off the stock.