A price floor (Minimum Price) set above the market equilibrium price has several side-effects. Consumers find they must now pay a higher price for the same product. As a result, they reduce their purchases or drop out of the market entirely. Meanwhile, suppliers find they are guaranteed a new, higher price than they were charging before. As a result, they increase production.
Taken together, these effects mean there is now an excess supply (known as a surplus) of the product in the market. In order to maintain the price floor over the long term, the government may need to take action to remove it.
Taken together, these effects mean there is now an excess supply (known as a surplus) of the product in the market. In order to maintain the price floor over the long term, the government may need to take action to remove it.
