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Price Floors

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Transcript of Price Floors

By: Gabi, Amanda, Mohammed, Jannik, and Fabian Price Floors Price floor is a minimum price of a good or service set by a governing body generally to help producers earn more revenue Definition Example of Price Floor Minimum Wage Excess supply:
Qs-Qd
Change in consumer expenditure:
(p*xq*)-(PfxQd)
Change in revenue (gov aid):
(p*xq*)-(PfxQs)
Government spending:
Pf x (Qs-Qd) Calculations The price floor MUST be above the equilibrium price to be effective Consequences Original equilibrium at q*,p*
Excess supply
Change in producer income (revenue)
Change in social surplus down
Elasticity of good determines surplus/ revenue changes What Happens in a Price Floor? Producers-
Sell more at higher price
Inefficient
More surplus
Government-
Loses tax dollars (ex. health/education)
Deal with bankrupt farmers
Consumers-
Lose a lot of surplus
Higher prices but less product
Tax Payers-
Pay for buying/storing surplus
Foreign "domestic" firms-
Complete with lower priced goods (bankrupt)
Social Surplus (welfare) Lose Protect producers by promising higher prices and possibly higher revenue
Provide a minimum wage for unskilled workers
To decrease the consumption of demerit goods Why Have a Price Floor? Government can buy up the excess supply
Store, Spoil, or Sell
Quantity supplied only Qd Solving the Excess Supply Problem A price floor on labor where producers: employees and consumers: employers
Increase the wage of unskilled worker
May increase labor productivity
Cutbacks on non-wage benefits (ex. paid holidays)
causes excess demand and unemployment
raises firms costs shifting supply resulting in a higher price of a good Surplus Production at Qd
Consumer- Down
Producer- Up
Social- Down
Government Intervention
Consumer- Down
Producer- Up
Social- Up Revenue PED:
Inelastic goods
Revenue up
Good
Elastic goods
Revenue down
Bad PES:
Inelastic goods
Revenue down
Bad
Elastic goods
Revenue up
Good Another Example http://www.guardian.co.uk/news/datablog/2012/mar/23/alcohol-minimum-price-supermarket
Full transcript