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A price floor is a government- or group-imposed price control or limit on how low a price can be charged for a product, [1] good, commodity, or service. It is one type of price support ; other types include supply regulation and guarantee government purchase price.
Let us consider a case where there are too many firms in the market, causing a negative profit. A negative profit would mean that firms would start to leave the market. As firms leave, there is more profit per firm. This gradually increases to an amount of 0 profit per firm, where firms do not have incentive to leave the market or join the market.
A government-set minimum wage is a price floor on the price of labour. A price floor is a government- or group-imposed price control or limit on how low a price can be charged for a product, [24] good, commodity, or service. A price floor must be higher than the equilibrium price in order to be effective. The equilibrium price, commonly called ...
Deadweight loss can also be a measure of lost economic efficiency when the socially optimal quantity of a good or a service is not produced. Non-optimal production can be caused by monopoly pricing in the case of artificial scarcity , a positive or negative externality , a tax or subsidy , or a binding price ceiling or price floor such as a ...
Economic graphs are presented only in the first quadrant of the Cartesian plane when the variables conceptually can only take on non-negative values (such as the quantity of a product that is produced). Even though the axes refer to numerical variables, specific values are often not introduced if a conceptual point is being made that would ...
The retailer will respond by setting its price at =. This results in a total quantity produced of =. The manufacturer's profit is 8, and the retailer's profit is 4. Not only is the total profit lower than in the integrated scenario, but the price is higher, thus reducing the consumer surplus.
If the price of the enterprise is high enough to offset the fixed cost above the marginal cost, it will attract the enterprise to enter the market to obtain more profits. Once the enterprise enters the market, it will occupy more market share by lowering the product price until economic profit reaches 0. [3]
The degree to which a firm can raise its price above marginal cost depends on the shape of the demand curve at a firm's profit maximising level of output. [47] Consequently, the relationship between market power and the price elasticity of demand (PED) can be summarised by the equation: