Binding Price Floor Diagram

Types of price floors.

Binding price floor diagram.

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. Another way to think about this is to start at a price of 100 and go down until you the price floor price or the equilibrium price. Perhaps the best known example of a price floor is the minimum wage which is based on the view that someone working full time should be able to afford a basic standard of living. This has the effect of binding that good s market.

Perhaps the best known example of a price floor is the minimum wage which is based on the normative view that someone working full time ought to be able to afford a basic standard of living. Note that the price floor is below the equilibrium price so that anything price above the floor is feasible. A price floor is the lowest legal price that can be paid in markets for goods and services labor or financial capital. A binding price floor is a required price that is set above the equilibrium price.

This can be depicted in a supply and demand diagram as such. For example if the equilibrium price for rent was 100 per month and the government set the price ceiling of 80 then this would be called a binding price ceiling because it would force landlords to lower their price from 100 to 80. The latter example would be a binding price floor while the former would not be binding.