A price floor only matters when it is set above the market price: then it stops the price falling.
Why governments set one
Support farmers' incomes
A guaranteed price keeps farms going when harvests and prices swing.
Protect low-paid workers
A minimum wage is a price floor on labour.
Cut a demerit good
A minimum price on alcohol makes cheap, strong drinks more expensive.
The points to remember
- Above the equilibrium price: the floor binds and causes a surplus.
- Below it: the market price is already higher, so the floor does nothing.
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Watch what a floor does to a farm market.
Our example (made-up numbers)
| Free market | With a floor of €8 | |
|---|---|---|
| Price | €6 | €8 |
| Buyers want | 40 | 20 |
| Farmers offer | 40 | 60 |
| Surplus | 0 | 40 |
Animated graph
Watch the graph build step by step in study mode.
Remember it as: A floor above the market price: a good price, but more than anyone wants to buy.
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A minimum wage works the same way in the market for workers.
Animated graph
Watch the graph build step by step in study mode.
Who gains, who loses
Workers who keep their jobs
They earn €8 instead of €6.
Workers who lose out
Firms hire fewer people, so some cannot find work.
Consumers
They pay more for the good, or for goods made by low-paid workers.
Government
It buys and stores surpluses, paid by taxpayers.
Paper 2 asked this in November 2023, for 4 marks.
Using a labour market diagram, explain the possible impact on the unemployment rate of increasing the minimum wage.
Model answer plan
See the answer broken into clear points, with guidance on how each point earns marks.
Animated graph
Watch the graph build step by step in study mode.
What the diagram must show
- Axes W and Q of labour; D and S of labour; We and Qe.
- Wmin1 above We, then a higher Wmin2.
- Unemployment (Qs − Qd) shown at each: the second bigger.
How the 4 marks are given
| Marks | What your answer needs |
|---|---|
| 3–4 | A correct diagram and a correct explanation |
| 1–2 | A correct diagram or a correct explanation, not both |
| 3 at most | A diagram with a wrong or missing label |