With the aid of supply and demand diagrams demonstrate that any and all effective price
controls in a competitive market will reduce the actual quantity that can be traded (i.e.
bought and sold) in that market.
• Price Floor
Having a price floor means that the market price cannot go below the set lowest price.
The price floor is put into effect when the sellers in the market are unable to obtain a reasonable
price for their goods. For this, we see that PF > PE. As shown in the diagram below, QE is the
quantity equilibrium and PE is the price equilibrium, their juncture is the best price and quantity.
You can also see in the diagram that the price floor splits the supply and demand curves creating
the Quantity demanded at the price floor (QF) and the quantity supplied at the price floor (QS).
In the market, the maximum trade can only be at QF since buyers are not willing to pay higher
than the price floor. With this, we see the result of trade volume decreasing (QE-QF) by
imposing a price floor since the quantity demanded at the price floor is less than the quantity
equilibrium.
