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Economics Assignment

Introduction to Principles of Economics

In a free-market economy, the equilibrium price is determined where the demand for the good is equal to the supply of the good. However, sometimes the government intervenes in the market by the means o price controls. The price floor can be understood as the minimum price of a product as fixed by the government which at which the seller has to sell the good (Libich, Stonecash, Gans, Byford, Mankiw & King, 2017).

Binding Price Floor

If the price floor is set below the equilibrium price for a good, then the price floor is not effective since the main purpose of setting the price floor is to protect the prices from decreasing below a certain level (Libich et al. , 2017). The price floor will be binding when the price which is fixed by the government is above the equilibrium price level. At a price higher than the equilibrium level, the quantity su....