ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -A binding price floor occurs when the price floor is set at a point above the market equilibrium price. The setting of a price floor at this level results in a surplus, because the quantity supplied at that price is higher than the quantity demanded.

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: -Binding Price Floor The equilibrium market price is P* and the equilibrium market quantity is Q*. At the price P*, the consumers’ demand for the commodity equals the producers’ supply of the commodity. The government establishes a price floor of PF. Therefore, prices in the market can’t fall below PF.

Detailed explanation-4: -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.

Detailed explanation-5: -If the government sets a binding minimum wage (price floor), it must be set above the equilibrium price. In Figure 4.5d, the equilibrium wage is shown as $10/hour.