Price Floor

What Is Price Floor?

A price floor is a government-imposed legal minimum price that may be paid for a good or service. Intended to support sellers' incomes, its effect depends on placement relative to equilibrium. A price floor is binding only when set above the equilibrium price; there, the quantity supplied exceeds the quantity demanded and a persistent surplus results. Set below equilibrium, a floor is non-binding and leaves the market outcome unchanged. The most familiar example is a minimum wage in the labor market: when set above the market-clearing wage, the standard model predicts a surplus of labor, meaning more people seeking work than employers wish to hire.

Why It Matters

Price floors demonstrate the mirror image of price ceilings. By holding a price above equilibrium, a binding floor guarantees a surplus: sellers want to supply more than buyers will take. Agricultural price supports leave unsold crops, and a minimum wage above the market-clearing wage produces a labor surplus, which in the standard model appears as unemployment among the workers priced out of jobs. Like ceilings, binding floors create deadweight loss by preventing mutually beneficial trades at the equilibrium price. Economists study floors to weigh trade-offs: a minimum wage can raise pay for those who keep their jobs while reducing the number of jobs offered, so its net effect depends on how responsive employment is to wages.

Test Your Knowledge

Questions on this topic from the EconRecall fact bank:

• What is a price floor?
  A government-imposed legal minimum price that may be paid for a good or service
• A price floor is binding only when it is set where relative to equilibrium, and what does it cause?
  Above the equilibrium price, causing a persistent surplus