What is a price floor?

What is a price floor?

• A. A legal minimum on the price at which a good can be sold
• B. A legal maximum on the price at which a good can be sold
• C. A measure of how responsive quantity demanded is to a price change
• D. A policy that sets a minimum price for a good

Answer: (A)

A price floor is a legally established minimum price for a good or service. It’s used to prevent prices from falling too low and to support producers. When the floor is set above the market price, it binds, leading to a surplus where quantity supplied exceeds quantity demanded. If the floor is set below the market-clearing price, it has no real effect because the market would settle at the higher equilibrium price anyway. This concept is different from a price ceiling, which is a legal maximum price. A common example of a price floor is the minimum wage, which acts as a floor for the price of labor.

A price floor is a legally established minimum price for a good or service. It’s used to prevent prices from falling too low and to support producers. When the floor is set above the market price, it binds, leading to a surplus where quantity supplied exceeds quantity demanded. If the floor is set below the market-clearing price, it has no real effect because the market would settle at the higher equilibrium price anyway. This concept is different from a price ceiling, which is a legal maximum price. A common example of a price floor is the minimum wage, which acts as a floor for the price of labor.