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price floors - 5.c The Effects of Price Floors A price...

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5.c The Effects of Price Floors A price floor is a base price at which an item can be sold. If a price floor is imposed below the natural equilibrium price, it is not binding. A price floor that is not binding has no affect on the current price of a good. On the other hand, if the price floor is set above the equilibrium price, it is said to be binding, resulting in a surplus. Figure 5.c.1 demonstrates this with candy bars. Figure 5.c.1 Without free trade interference, the natural market price for a candy bar is $1.00. When the government imposes a price floor of $1.50, the quantity supplied (17) exceeds the quantity demanded (5) by 12 units, resulting in a surplus of candy bars.
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Figure 5.c.2 The natural market price for labor is $5. A minimum wage of $7 decreases the employer’s surplus (CS-consumer surplus) by the areas B and C. Meanwhile it increases the employees’ surplus (PS-producer surplus) by the area B and decreases it by the area E. Since the labor demanded decreased from 100 to 70, 30 people lost their jobs. There is also a surplus (unemployment) of 50 because the labor supplied exceeds the labor demanded.
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