Question

How does a price floor set above the equilibrium

level affect quantity demanded and quantity supplied?

Short answer

A price floor set above the equilibrium

level, causes quantity supplied to exceed quantity demanded resulting in a surplus.

Step-by-step solution

 Step 1. Definition

Price floor refers to the imposition of a lower limit on the price means fixing the minimum price of a commodity that has to be paid.

Step 2. Diagram

for example: government imposes minimum wage law, and its unlawful to pay less than certain amount for particular hours .

At the wage level, the quantity supplied of workers would be greater than quantity demanded, as the quantity demanded is inversely related with price while quantity supplied is positively related.

Step 3. Explanation

In the above diagram, the Equilibrium wage is 600, at this wage demanded workers are 10. when the government increased wages to 900 then, many more workers started seeking work but demands for workers are only 8, which created a surplus of workers.