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Mobile App Chapter 4: Q11 (page 104)
Select the correct answer. A price floor will usually shift:
a. demand
b. supply
c. both
d. neither
Illustrate your answer with a diagram.
Short Answer
Price Floor will shift : d) Neither demand, nor supply.
Step by step solution
Price Floor Concept
Price Floor is the minimum mandated price of a commodity, fixed by regulatory body, to protect the interests of sellers and prevent them from being exploited.
Example : Minimum support price of agricultural goods.
Detail Explanation
Price Floor is just an imposed price, above the equilibrium price - ie where demand & supply curves intersect.
It doesn't shift either demand or supply curve, just fixes a price above their intersection point. A change in the price can cause movement along the existing demand and supply curves, but not a shift.
Diagram
The equilibrium price is where demand & supply (D & S) intersect, denoted by P.
The floor price is set above equilibrium price at P*. As evident, it has shifted neither demand nor supply.
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