Floor

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DEFINITION

The lowest acceptable limit as restricted by controlling parties. Floors can be established for a number of factors, including prices, wages, interest rates, underwriting standards and bonds. Some types of floors, such as underwriting floors, act as mere guidelines while others,such as price and wage floors, are regulatory constraints that restrict the natural behavior of free markets.



INVESTOPEDIA EXPLAINS

Lenders use an underwriting floor to establish minimum guidelines for borrower creditworthiness and to determine the size of loan the borrower is qualified for.


A price floor is the lowest price that a government allows a good to be sold for. For example, the government might decide to establish a price floor for alcoholic beverages with the goal of lowering alcohol consumption for health reasons. In the absence of a price floor, the free market equilibrium price might be lower.


Minimum wage is an example of a wage floor. This floor is a minimum price per hour that a worker must be paid, as determined by federal and state governments. An unintended consequence may be to increase unemployment, as low-skilled workers are priced out of the labor market and companies cannot afford to hire as many employees.




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