A higher price is not a guarantee of sales.
A price floor is a legal minimum. Above the unrestricted equilibrium price, it raises quantity supplied and reduces quantity demanded, creating excess supply. With no government purchases and no other buyer, the smaller quantity demanded limits trade. Revenue depends on price multiplied by actual sales, so a higher price need not produce higher revenue.
- Binding
- A floor binds when its legal minimum is above the original equilibrium price. At that higher price, sellers want to offer more units but buyers want fewer. A floor below equilibrium does not force a price change.
- Excess supply
- Excess supply = quantity supplied minus quantity demanded at that price. It measures the extra units sellers want to sell, not units that definitely have already been produced.
- Sales
- Without government purchases, called procurement, or another buyer, quantity demanded limits actual sales. Multiply the price by units bought, not all units offered.
Price support and the labour market
Horizontal minimum
Draw the floor above initial equilibrium. Read Qd and Qs at that wage or price. The floor itself does not shift the curves.
No compulsory purchase
Excess supply is unsatisfied willingness to sell. It does not establish that government bought the gap or that every offered unit was produced.
Competitive labour example
A minimum wage is a legal minimum payment for labour. In the competitive model, label the axes wage per hour and labour hours: employers demand hours, while workers supply them. Excess supply is hours offered but not hired. The wage bill is wage per hour x hours actually hired, so a higher wage can be offset by fewer hours.
Model limit
The basic competitive model does not establish an unconditional real-world employment effect. Other market conditions, compliance, hours and productivity need evidence.
Worked example: An $8 minimum price
Demand is P=10-0.05 Q and supply is P=2+0.05 Q, with quantity in units per day. Without intervention, price is $6 and 80 units sell. Government sets an $8 floor but does not buy unsold output.
- At $8, quantity demanded is 40 and quantity supplied is 120. Excess supply is 80 units.
- Only 40 units sell to consumers. Revenue is 8x 40=$320, below the original 6x 80=$480.
- The 120 units are what sellers would offer at that price, not guaranteed sales or necessarily completed production.
- If government instead promises to buy the entire 80-unit gap, purchases cost $640 and total seller receipts become 8x 120=$960. That is an additional policy.
Watch out for this
At a floor, multiply the price by quantity supplied to get revenue.
Use the quantity actually bought. Quantity supplied is appropriate only if all those units are purchased.
Check your understanding
A binding minimum wage raises wage per hour by 20% while hours hired fall by 25%. What happens to the wage bill?
- It rises 20%.
- It stays the same.
- It falls 10%.