How does a price floor set above the equilibrium level affect quantity demanded and quantity supplied?

A price floor is a minimum price set by the government or any other regulatory authority for a particular product or service. This minimum price is set above the market equilibrium price, where the quantity demanded is equal to the quantity supplied. The equilibrium level is a state where the supply of a product or service meets its demand perfectly without any surplus or shortage. This occurs when the quantity demanded and quantity supplied are equal.

If a price floor is set above the equilibrium level, it creates a surplus in the market. The reason behind this is that the higher price set by the government discourages consumers from purchasing the product, leading to a reduction in the quantity demanded. Conversely, the higher price encourages producers to supply more of the product in the market. This results in a higher quantity supplied than the equilibrium quantity. Thus, when the price floor is set above the equilibrium level, the relationship between quantity demanded and quantity supplied is affected as follows: 1. Quantity Demanded: Decreases 2. Quantity Supplied: Increases

The surplus created as a result of the price floor occurs when the quantity supplied is greater than the quantity demanded. This surplus can have several consequences for the market: - A price floor may lead to inefficiencies in the allocation of resources. Producers may overproduce a product that has a government-imposed price floor, resulting in excess inventory. - Price floors can also lead to wastage of resources if the surplus products cannot be sold. This wastage can occur in the form of spoilage, rot, or obsolescence. - Price floors can lead to inefficiencies within the market by preventing the market from functioning properly. This, in turn, can result in market distortions as producers and consumers do not receive the correct market signals for future production and consumption decisions.

In summary, when a price floor is set above the equilibrium level, it results in the following effects: 1. Quantity demanded decreases: Consumers are discouraged from purchasing the product at the higher price. 2. Quantity supplied increases: Producers are encouraged to supply more of the product in the market at the higher price. 3. Surplus: The difference between the quantity supplied and the quantity demanded leads to a surplus in the market, which can create inefficiencies, wastage of resources, and market distortions.