price floor

Examples of price floor in the following topics:

• Price Floors

  • A binding price floor is a price control that limits how low a price can be charged for a product or service.
  • A price floor is a price control that limits how low a price can be charged for a product or service.
  • Generally floors are set by governments, although groups that manage exchanges can set price floors as well.
  • An example of a price floor is the federal minimum wage.
  • The federal minimum wage is one example of a price floor.

• Price Floor Impact on Market Outcome

  • Binding price floors typically cause excess supply and decreased total economic surplus.
  • A price floor will only impact the market if it is greater than the free-market equilibrium price.
  • If the floor is greater than the economic price, the immediate result will be a supply surplus.
  • A price floor will also lead to a more inefficient market and a decreased total economic surplus.
  • An effective price floor will raise the price of a good, which means that the the consumer surplus will decrease.

• Impacts of Surpluses and Shortages on Market Equilibrium

  • In the analysis of market equilibrium, specifically for pricing and volume determinations, a thorough understanding of the supply and demand inputs is critical to economics.
  • Surpluses and shortages on the supply end can have substantial impacts on both the pricing of a specific product or service, alongside the overall quantity sold over time.
  • Governmental intervention can often create surplus as well, particularly through the utilization of a price floor if it is set at a price above the market equilibrium .
  • This disparity implies that the current market equilibrium at a given price is unfit for the current supply and demand relationship, noting that the price is set too low.
  • A price floor ensures a minimum price is charged for a specific good, often higher than that what the previous market equilibrium determined.

• Arguments for and Against Government Price Controls

  • Well designed price controls can do three things.
  • Finally, when shortages occur, price controls can prevent producers from gouging their customers on price.
  • Price floors often lead to surpluses, which can be just as detrimental as a shortage.
  • One of the best known price floors in the minimum wage, which establishes a base line per hour wage that must be paid for work.
  • Justify the use of price controls when certain conditions are met

• Impacts of Price Changes on Consumer Surplus

  • Consumer surplus decreases when price is set above the equilibrium price, but increases to a certain point when price is below the equilibrium price.
  • Consumer surplus is defined, in part, by the price of the product.
  • A binding price ceiling is one that is lower than the pareto efficient market price.
  • When a price floor is set above the equilibrium price, consumers will have to purchase the product at a higher price.
  • An increase in the price will reduce consumer surplus, while a decrease in the price will increase consumer surplus.

• Evaluating Policies

  • Subsidies: The government can utilize subsidies to reduce price points and increase the overall supply within a system .
  • Price Floors/Ceilings: Price floors provide a minimum price point for a given product while price ceilings create a maximum price point.
  • These are used to ensure appropriate pricing in a given industry (see ), and are often used in agriculture to control price points.
  • Import Quotas: Policy makers often implement quotas in agriculture to retain more control over prices and protect domestic incumbents.
  • This is useful in controlling food prices, reducing waste, enabling efficiency and avoiding biosecurity issues.

• Other Inputs to Pricing Decisions

  • Factors to consider in pricing include Economic Value added to Customers (EVC), competitor's pricing, and government regulations.
  • Therefore, to sell a product, a firm needs to price at or below its competitor's price plus the value advantage its product has to the customer over the rival product.
  • The price of two servers from the competitor is $6,800.
  • Price controls are governmental restrictions on the prices that can be charged for goods and services in a market.
  • There are two primary forms of price control, a price ceiling, the maximum price that can be charged, and a price floor, the minimum price that can be charged .

• Settling the List Price

  • A list price must be close to the maximum price that customers are prepared to pay and yield the maximum profit for the retailer.
  • Pricing is a key variable in micro-economic price allocation theory and part of the four "P's-" of the marketing mix; pricing, product, promotion and place.
  • The manufacturer's suggested retail price (MSRP), list price or recommended retail price (RRP) of a product is the price which the manufacturer recommends to the retailer.
  • Value to the customer should be taken into consideration in addition to pricing objectives, profit maximization, geographic and buying habit considerations, discounting, rate of return, competitive indexing, the image conveyed by the price, customer price sensitivity, any legal restrictions, the category price points, price ceilings and floors and how payment is to be made.
  • A good pricing strategy is one that strikes a balance between the price floor (the price below which the organization ends up in losses) and the price ceiling (the price beyond which the organization experiences a no demand situation).

• Introduction to Deadweight Loss

  • In a perfectly competitive market, products are priced at the pareto optimal point.
  • The chart above shows what happens when a market has a binding price ceiling below the free market price.
  • Without the price ceiling, the producer surplus on the chart would be everything to the left of the supply curve and below the horizontal line where y equals the free market equilibrium price.
  • With the price ceiling, instead of the producer's surplus going all the way to the pareto optimal price line, it only goes as high as the price ceiling.The consumer surplus extends down to the price ceiling, but it is limited on the right by Harberger's triangle.
  • This chart illustrates the deadweight loss created when a price floor is instituted on the market for a good.

• Pricing a Security

  • The price of a security reflects the value of the asset underlying it.
  • The observed prices serve as valuation benchmarks.
  • From the prices, one calculates price multiples such as the price-to-earnings or price-to-book value ratios.
  • Any cash that would remain establishes a floor value for the company.
  • Normally, the discounted cash flows of a well-performing company exceed this floor value.