A price floor is defined as a minimum price allowed for a good. This is a regulatory measure set by the government or regulatory authority to ensure that prices do not fall below a certain level. The purpose of a price floor is often to protect producers and ensure they can cover their costs, thus maintaining stability in the market for that good.
For instance, in agricultural markets, governments may impose price floors to ensure farmers receive a fair return on their products, thereby supporting their livelihoods. When a price floor is set above the equilibrium price, it can lead to a surplus, as suppliers may be willing to produce more of a good at the higher price, while consumers may buy less due to the increased cost.
Understanding the concept of a price floor is essential in microeconomics because it illustrates how government intervention can affect supply, demand, and market equilibria.