What does price floor mean?

Hi,

I heard this term on a TV news debate once and I kept wondering what does price floor mean. To be honest, I studied it in the economics lessons but it's been a long time and I drifted apart from the subject. Nonetheless, I had to know about it or else I would have been unsettled. I asked a school friend who is an actuarial scientist. He helped in reminding me about its meaning. Let me share that with you.

Price floor is basically the lower limit of the price of a good or commodity in the market. It is set by the government. It is done so that the price of that good or commodity doesn’t fall lower than the price floor. 

There are two types of price floor:

• Binding price floor: This is the price which is greater than the equilibrium price of the good or commodity. The producers benefit in this case even if they sell a lower quantity of the commodity as they get the binding price. 

• Non-binding price floor: This is the price floor which is lower than the equilibrium price of the good or commodity. Producers and consumers do not get affected by the non-binding price floor

When I recalled what does price floor mean, I also remembered why price floor exists. So I thought, I’d share that with you:

• Price floors are for assistance of producers to encourage production

• Introduction of price floors in inelastic market allows the government to carry out welfare programs

I hope you have your answers now. Let me know if you have anything to add in the comments right below.