Question

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

The correct answer is d. neither. A price floor does not shift the demand or supply curves. Instead, it causes a surplus in the market and creates a deadweight loss, leading to market inefficiency. An illustration of this concept can be drawn with a graph containing both demand and supply curves, highlighting the equilibrium price and quantity, the price floor level, and the deadweight loss created in the market.

Step-by-step solution

Understanding price floors

A price floor is a minimum price set for a particular good or service by the government or a regulatory body. It is usually set above the equilibrium price to protect producers and ensure they receive a fair price for their products.

Identify the impact of price floors on demand and supply

When the price floor is set above the equilibrium level, the quantity supplied will be more than the quantity demanded. This means that at the price floor, there will be a surplus or an excess supply in the market. However, the setting of the price floor does not shift the supply or demand curves themselves. Instead, it creates a "deadweight loss," causing inefficiency in the market.

Select the correct answer

Based on the information above, the correct answer is: d. neither A price floor does not shift the demand or supply curves; it only causes a surplus in the market.

Illustrating the answer with a diagram

To create a diagram that shows the impact of a price floor on demand and supply, follow these steps: 1. Draw both the demand and supply curves on a graph, with quantity on the x-axis and price on the y-axis. 2. Label the equilibrium price and quantity (P_e and Q_e). 3. Determine the price floor level and draw a horizontal line at that price. 4. Identify the quantity of goods supplied and demanded at the price floor. 5. Highlight the deadweight loss, which is the area between the demand curve and the supply curve within the range of the price floor and the quantities of supply and demand affected by the price floor. The diagram should show that the price floor has no impact on shifting the demand or supply curves; it only creates a market inefficiency by causing a surplus of goods at the set price.