ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -When the price floor is above the equilibrium price, the quantity supplied will exceed the quantity demanded as will create surplus supply due to higher price and a simultaneous fall in demand.

Detailed explanation-2: -An effective (or binding) price floor is one that is set above equilibrium price. An effective (or binding) price ceiling is one that is set below equilibrium price. Effective price ceilings and floors create dead-weight loss. An effective price floor creates a surplus and benefits suppliers.

Detailed explanation-3: -For a price floor to be effective, it must be set above the equilibrium price. If it’s not above equilibrium, then the market won’t sell below equilibrium and the price floor will be irrelevant.

Detailed explanation-4: -A surplus exists when the price is above equilibrium, which encourages sellers to lower their prices to eliminate the surplus. A shortage will exist at any price below equilibrium, which leads to the price of the good increasing.

Detailed explanation-5: -A price floor above the competitive equilibrium price will result in a surplus. A price ceiling above the competitive equilibrium price will result in a surplus. A price ceiling below the competitive equilibrium price will result in a shortage.