What is price floor?

A price floor is a lower limit on a price, set to protect sellers. Minimum wages and guaranteed prices for farm products are familiar examples. It matters because a floor placed above the natural price helps those who can sell at it, yet it can leave some sellers or workers without any buyer.

How it works

If the floor sits below the usual market price, it has no effect. If it sits above, sellers want to offer more at the higher price while buyers want to purchase less. The result is a surplus: the quantity supplied exceeds the quantity demanded at the floor price.

The surplus has to go somewhere. It may pile up as unsold stock, show up as unemployment when the good is labor, or be bought by the government. Each of these has a cost, and the cost of holding or buying the surplus grows the more the floor exceeds the natural price. The people who sell at the floor gain, while those who cannot sell lose.

Example

Say a market for a crop would settle at 10 per unit with 1,000 units traded. A floor of 12 is introduced. At 12, farmers want to sell 1,200 units, but buyers want only 800. The surplus is 400 units. If the government buys the surplus at 12, it spends 400 times 12, which is 4,800. Farmers who sell 800 units gain 2 each, or 1,600 more than before. These numbers are made up to show the arithmetic.

How to model it in Machinations

Use a Source for production with a rate set by a Register that rises with the price, and a Drain for buyers whose rate falls with the price. A Pool called Unsold stock collects the difference. Add a Lever for the floor price and a second Drain that represents public purchases, paid from a budget Pool. Play with the floor at 10 and at 12, and chart the unsold stock and the budget to see the cost build up.