Price Floor and Minimum Wage

A price floor is defined as a legal minimum on the price of a good, service or factor of production. Setting a price lower than the legal minimum is illegal.

• When this is imposed on a competitive market, a surplus of a good or service can arise. This is because the quantity supplied is higher than the quantity demanded. This prevents sellers to sell all of their goods and services at the market equilibrium price.

An example is the minimum wage.

Under the minimum wage law, hiring labor for less than a specified wage is illegal. For example, if the minimum wage was $10.00, then any wage below this amount is illegal. Minimum wage is intended to increase the income of low earning individuals. However, this can cause a business to limit the number on hiring new employees. This can then lead to unemployment for many individuals. Therefore, minimum wage can lead to unemployment.

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