Question

Explain the effects of price floors and government-imposed quantity restrictions

Short answer

Imposing a minimum price above the equilibrium leads to excess supply.

Step-by-step solution

Step1. Introduction

Price floor is a method of price control where the government introduces a minimum price at which the exchange of that particular good can occur. This price is above the market equilibrium price.

Step2. Explanation

When such price which is above the market equilibrium is imposed, it implies that suppliers will supply more than the equilibrium quantity and consumers will demand less than the equilibrium quantity. This leads to a situation of excess supply in the market.

Quantity restrictions are similar to quotas where the government, instead of controlling the equilibrium through price, attempts to control it directly by altering quantities. The government may restrict the producers to produce more than a given limit.