Answer to Question #121042 in Microeconomics for Mohammad waqas

Question

how i can analyze with the help of graph the possible consequences of setting price floor of sugarcane below equilibrium price?

Answer 1

The prevention of a price from rising above a certain level is what we call as price ceilling.

If incase a price ceilling is set below the equilibrium price, then the quantity demanded will exceed quantity supplied, thereby resulting to excess demand or shortages.

On other hand preventing a price from falling below a certain level is what we call price floor

Then graphically the intersection of demand (D) and supply (S) would be at the equilibrium point E0.

However, when a price floor set at Pf holds the price above E0 and prevents it from falling.

Thereby the result of the price floor is that the quantity supplied Qs exceeds the quantity demanded Qd. There is excess supply, also called a surplus.