A price floor is a____ set ____the equilibrium price.
The correct answer and explanation is :
A price floor is a minimum price set above the equilibrium price.
Explanation:
A price floor is a government-imposed minimum price that must be paid for a good or service. It is set above the equilibrium price, which is the price at which the quantity of a good demanded by consumers equals the quantity supplied by producers. Price floors are used to prevent prices from falling too low, typically to protect producers or workers.
How Price Floors Work:
- Equilibrium Price: This is where supply and demand intersect. Without government intervention, the market naturally settles at this point.
- Government Sets a Price Floor: When the government establishes a price floor above equilibrium, suppliers must charge at least this minimum price.
- Surplus Creation: At the higher price, producers want to supply more of the good, but consumers demand less because the price is too high. This leads to a surplus—more goods available than consumers are willing to buy.
Examples of Price Floors:
- Minimum Wage: Governments set minimum wages to ensure workers receive a livable income. If the wage is set too high, businesses may reduce hiring, leading to unemployment.
- Agricultural Price Supports: Governments sometimes set price floors for crops to support farmers, but this can result in excess supply.
- Alcohol Pricing: Some governments set price floors on alcohol to discourage excessive consumption and protect public health.
Effects of Price Floors:
- Positive: Protects producers/workers, ensures minimum income.
- Negative: Can create surpluses, inefficiencies, and unemployment.
Here is an image illustrating the concept of a price floor. It shows supply and demand curves intersecting at the equilibrium price, with a price floor set above equilibrium, leading to a surplus.