Minimum Wage Price Floor Diagram

Supply and demand models suggest that there may be welfare and employment losses from minimum wages.

Minimum wage price floor diagram.

Equilibrium wage rate is rs. Our price floor is right over here 7. The equilibrium price commonly called the market price is the price where economic forces such as supply and demand are balanced and in the absence of external. Most countries had introduced minimum wage legislation by the end of the 20th century.

In our supply and demand analysis a minimum wage is a simple application of a binding price floor. The price floor is determined at rs 4 which is good for workers who will earn more than before. A price floor must be higher than the equilibrium price in order to be effective. That was a maximum price for rent now this is a minimum price for labor.

Once introduced at pmin the price floor will cause an excess supply surplus of q3 q1 because quantity demanded is q1 and quantity supplied is q3. Legislating a minimum wage is commonly seen as an effective way of giving raises to low wage workers. In this video we take a look at the minimum wage. However if the labor market is in a state of monopsony.

For a price floor to be effective the minimum price has to be higher than the equilibrium price. Minimum prices are price floors and are most commonly associated with minimum wages in the labour market or guaranteed price support schemes for farmers or other producers. In this case the price which is typically on the y axis is the wage which gets paid to workers. This right over here is our minimum wage.

But this has a flip side too. This is shown by the diagram below. Our basic analysis in this section focuses on this. Price floors when prices are kept artificially high lead to several consequences that hurt the consumer.

For example many governments intervene by establishing price floors to ensure that farmers make enough money by guaranteeing a minimum price that their goods can be sold for. Since the price floor this minimum price is higher than the actual clearing price it s going to distort the market. A price floor is a government or group imposed price control or limit on how low a price can be charged for a product good commodity or service. The most common example of a price floor is the minimum wage.

A minimum wage is the lowest remuneration that employers can legally pay their workers the price floor below which workers may not sell their labor. Unfortunately it like any price floor creates a surplus. As seen in the diagram minimum price is set above the market equilibrium price. When we talked about rent control that was a price ceiling.

In this simplistic model it is best to think of the wage as how much a firm pays to get one worker.