Question

How does a price floor set above the equilibrium price affect quantity demanded and quantity supplied?

Answer 1

When the price floor is set above the equilibrium price, the quantity supplied exceeds the quantity demanded, creating an oversupply or surplus. When government laws regulate prices instead of letting market forces set prices, this is the equilibrium price affect quantity demanded and quantity supplied.

If demand does not change, there is an inverse relationship between supply and price of goods and services. When the supply of goods and services increases at the same demand, prices tend to fall resulting in lower equilibrium prices and higher equilibrium quantities of goods and services.

Setting the price cap below the equilibrium price causes demand to exceed supply, resulting in overdemand or shortage. A floor price prevents the price from falling below a certain level.

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