Question

• Given a scenario, draw a supply/demand graph, beginning with a market in equilibrium, and show the effect of the implementation of a price floor on equilibrium price and quantity.

Answer 1

As it can be seen in the diagram that equilibrium quantity and price are determined by equality of demand and supply curve. So equilibrium price is P* and quantity is Q*.

But when price floor has been imposed, then new price will be P_F. At this price floor quantity demand is Qd and quantity supplied is Qs but quantity supply is greater than quantity demand. Hence there is a surplus quantity. It means less quantity are traded in the market compare to equilibrium quantity. Due to less quantity traded, Deadweight loss arises.