ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -When the quantity supplied is equal to the quantity demanded it is called the equilibrium point. 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: -When a price floor is set above the equilibrium price, quantity supplied will exceed quantity demanded, and excess supply or surpluses will result. When government laws regulate prices instead of letting market forces determine prices, it is known as price control.

Detailed explanation-3: -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-4: -Price floors can also be set below equilibrium as a preventative measure in case prices are expected to decrease dramatically. In such situations, the quantity supplied of a good will exceed the quantity demanded, resulting in a surplus.

Detailed explanation-5: -What happens to equilibrium supply and demand if a price floor is set below the equilibrium price? Nothing happens. Since the floor is below equilibrium, the market is still able to determine the quantity and price the same way it always does.