Answer to Question #204335 in Microeconomics for marleyna

Question

what would we expect to happen to the market when the government imposes a price floor below equilibrium?

Answer 1

Solution

When price floor is set below equilibrium, this is when the equilibrium price is regarded to be very high for poor consumers to afford essential commodities thus leading to excess demand of goods in the market and less supply

In the above diagram it can be seen that the price P₁ has been set below, the equilibrium price P_e.

As a result excess demand is represented by Q₁Q₂ is created since at P₁ supplier is willing to supply only Q₁

while consumers are willing to buy Q₂.

• Therefore with excess demand of goods activities such as black market and smuggling are likely to take place.
• Shortages created in the markets.
• Government forced to ration the little that is available for everyone to get something.