Answer to Question #58306 in Microeconomics for Eric

Question

What are the effects of price floors?
Will the supply of the good increase or will there be over supply of the good?

Answer 1

What are the effects of price floors?
In case a price floor set below the free-market price it has no practical effect. If a price floor set above the market equilibrium price it has several side-effects. Consumers find they must now pay a higher price for the same product. As a result, they reduce their purchases or drop out of the market entirely. Meanwhile, suppliers find they are guaranteed a new, higher price than they were charging before. As a result, they increase production.

Will the supply of the good increase or will there be over supply of the good?
If a price floor is higher than the market equilibrium price, consumers are willing to purchase less product than equilibrium quantity and suppliers produce more than equilibrium. That's why supply is higher than demand and there will be over supply of the good in the market.