Answer to Question #177200 in Microeconomics for Ryan Bourke

Question

Head Office is considering the placement of a ‘price floor’ for the sale of Cloud 9-branded yoghurt. The price floor will help consumers by maintaining a lower than equilibrium price. 

Answer 1

The given statement is not correct.

Price floors keep a price from dropping below a certain amount. When a price ceiling is set below the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or shortages will result thereby affecting consumers.

A price floor is a legally binding minimum price that allows for the price to rise to its equilibrium level. A price floor below equilibrium, in other words, will not be binding and will have no effect. 

In the end, a price floor is more harmful to society than good because it causes a deadweight welfare loss that leads to lower supply.