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What Is a Price Floor?

In capitalist countries like the US, market forces are mostly responsible for the prices of goods and services rising and falling over time. However, ethical economies also leverage special controls, like price floors, to prevent major issues and ensure that goods can never become too cheap.

But what exactly is a price floor, and how does it work? Read on to learn more.

Price Floors Explained

A price floor is a legally mandated lower boundary or a minimum price for a good, service, or some other commodity in the market. Put another way, a price floor is the lowest possible price that something can be as regulated by the government.

For example, if someone wants to sell a specific item for $5, but the price floor is $6, that vendor has to sell the product at $6 regardless of other market conditions, like their budget, what they need to make a profit, etc. Because price floors are federally mandated, they are important to keep in mind and pay attention to.

Price Floor Example

Perhaps the most well-known price floor is the minimum wage. The minimum wage is the federal minimum amount of money that someone has to be paid on an hourly basis if they work a standard job (jobs that include tips or commissions are sometimes excluded).

The federal minimum wage is calculated based on the idea that someone working full-time with a minimum wage should be able to afford basic living necessities, like rent, food, etc. As of 2016, the federal minimum wage has been $7.25 per hour. Note that many states and localities have higher minimum wages. However, these are usually to compensate employees for a higher cost of living (so they are more common in metropolitan areas).

Per the federal minimum wage, the minimum annual yield for a full-time working individual is $15,080, which is a little higher than the currently established federal poverty line, hovering around $11,880. From time to time, Congress raises the federal minimum wage in order to keep up with inflation and to reflect other economic developments.

Price Floors in Marketing

Price floors can also be used in marketing in a variety of contexts. For example, ad publishers that have ad inventory may set price floors or minimum prices lower than which bidders can’t go. In essence, price floors help establish the minimum profit that a publisher can make when selling ad inventory.

Why Are Price Floors Important?

Price floors are important for one big reason: they prevent business owners from taking advantage of workers and consumers alike. They also help to stabilize the economy overall.

Price floors are oftentimes called price supports because they can support the prices of labor or goods by preventing them from going below a specific level. For example, many countries worldwide have various price floor laws for agricultural prices. That’s to ensure that farmers are paid a living wage no matter what and to reflect the truth that harvests and yields can vary from year to year.

Thanks to price floors and supports, farmers don’t have to worry about one bad year putting them out of business. That’s a good thing, as well, because the economy overall would suffer if farmers had to adopt other practices to prevent this or if farmers were constantly changing jobs because of bad seasons.

Think of price floors as market mandates imposed by the government in order to ensure that the playing field is relatively fair for everyone. As a business owner, the most important price floor you probably have to deal with is minimum wage. But price floors are always necessary. Any economy without them would quickly devolve in one way or another. 

The Effects of Price Floors

Price floors do have effects on both local and global economies. Producers — such as goods manufacturers, farmers, etc. — don’t always benefit or lose when price floors are implemented. In fact, price floor results or effects for producers are usually ambiguous. It largely depends on market context, like what industry a producer is in, the state of its bottom line or budget, etc.

In contrast, price floors have more straightforward and measurable impacts on customers or consumers. Consumers very rarely, if ever, gain from price floors. That's because they technically have to pay more for products than they might if the market is left unchecked.

That said, workers usually benefit from price floors (they are technically types of producers, even if they work for companies rather than for themselves). Price floors mandate minimum purchase prices for various goods or for labor.

It’s easy to imagine how America’s workers benefit from price floors. By implementing a minimum wage, the federal government has prevented companies from simply rewarding the workers willing to do as much work as possible for as little money as possible. Such a situation would result in a “race to the bottom” job market and economy, resulting in overall lower quality living conditions and buying power for average consumers.

How Do Price Floors Work?

Depending on the price floor in question, the government can implement price floors in different ways.

For example, the government can set a law mandating a price floor. This is what happens with minimum wage every few years.

However, governments can also enter the market and purchase products at a specific price. In this way, they can artificially prevent the prices of goods or commodities from falling below a specific level. This is a common approach with the European Union.

For instance, the Common Agricultural Policy reform — a law passed in 2013 — required that the EU government spend around €60 billion per year on price support for Europe's farmers between the years of 2014 and 2020. The government of Ukraine may adopt price floors due to its recent economic turmoil, as well.

Types of Price Floors

There are a few different types of price floors you need to know about.

  • Binding price floor. This type of price floor is greater than the current market price equilibrium. With this type of price floor, commodity producers are better off if the higher price of the goods makes up for selling a lower quantity. Consumers, on the other hand, are worse off due to binding price floors since they have to pay more for a lower quantity of products.
  • Nonbinding price floor. Nonbinding price floors are the opposite; they are lower prices than the current market price equilibrium. Nonbinding price floors don't normally affect markets outright or immediately. Both consumers and producers can be better off as a result of nonbinding price floors since they act more as guidelines as opposed to market corrections.

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Price floors are the lowest legal prices that a person or organization can charge for a good or service. Price floors are only utilized for certain things, like worker wages, but they’re important to ensure that capitalist economies keep working properly and aren’t taken advantage of or spiral out of control.

Of course, price floors don’t affect things like billboard ad prices, which is why you need helpful platforms like AdQuick. AdQuick can help you manage your billboard ad campaigns and purchase billboard advertisement spots quickly and easily, so check it out today.


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