ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Price floors lead to a surplus of the product. Supply surpluses created by price floors are generally added to producer’s inventory or are purchased by governments. Consumer surplus is the gain obtained by consumers because they can obtain a product for a lower price than they would be willing to pay.

Detailed explanation-2: -A price floor or a price ceiling will prevent a market from adjusting to its equilibrium price and quantity, thus creating an inefficient outcome.

Detailed explanation-3: -Price ceilings prevent a price from rising above a certain level. When a price ceiling is set below the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or shortages will result.

Detailed explanation-4: -A binding price floor leads to a surplus while a binding price ceiling leads to a shortage. In both cases though, the actual quantity traded decreases since there is a mismatch between the quantity supplied and quantity demanded.