Question

What would be the impact of imposing a price floor below the equilibrium price?

Short answer

Imposing a price floor below the equilibrium price does not have any significant impact on the market as it does not interfere with the current market situation. The market will continue to function as if there were no price floor, with the equilibrium price and quantity remaining unchanged. The price floor would only become binding and affect the market if it were set above the equilibrium price, leading to a surplus of supply and decrease in the quantity demanded.

Step-by-step solution

Understanding price floor and equilibrium price

A price floor is a minimum price set by the government or an authority for a certain product or service, while an equilibrium price is the price at which the quantity demanded by consumers equals the quantity supplied by producers in the market. When the market price is at its equilibrium price, there is no shortage or surplus of supply, and the market clears.

Identifying the demand and supply curves

Begin by illustrating the market with the help of demand and supply curves. The demand curve represents the relationship between the price of the good and the quantity demanded by consumers. It slopes downward because a lower price makes the product affordable, increasing the quantity demanded. On the other hand, the supply curve represents the relationship between the price of the good and the quantity supplied by the producers. It slopes upward because higher prices make the production more profitable, leading to an increase in the quantity supplied.

Locating the equilibrium price and quantity

To find the equilibrium price and quantity, look for the point where the demand curve and the supply curve intersect. This intersection point indicates the price at which the quantity demanded equals the quantity supplied, and both producers and consumers are satisfied.

Imposing a price floor below the equilibrium price

Now let's impose a price floor that is below the equilibrium price. Since the price floor is below the equilibrium price, it does not interfere with the current market situation. Producers can still charge a price equal to or above the price floor and sell their goods or services without any legal consequences.

Analyzing the effects of the price floor on the market

Since the price floor is set below the equilibrium price, it does not have any real impact on the market in this case. The quantity demanded remains the same as the equilibrium quantity, so there is no shortage or surplus in the market. The price floor would only become binding (having an effect on the market) if it were set above the equilibrium price. In such a case, it would result in a surplus of supply, as the price would be higher than what the consumers are willing to pay, leading to a decrease in the quantity demanded and excess supply. In conclusion, imposing a price floor below the equilibrium price does not have any meaningful impact on the market. The market will continue to operate as if there were no price floor, with the equilibrium price and quantity remaining unchanged.