Question

Draw a supply and demand model in equilibrium in Q*=50 and P*=$3. label the equilibrium point E. Impose a price floor of $4 per unit in the market. Indicate on the graph where new levels of supply and demand expressed. Illustrate how this price floor create a surplus in the market.

Answer 1

In the graph above initial quantity is 50 and initial price is $3 where the market is in equilibrium

When the price floor of $4 is imposed in the market,the quantity supplied increases to Q3 say its 60 whereas quantity demanded decreases to Q2 say its 40 therefore QS>QD and there is a surplus of Q3-Q2 = 60-40=20 units in the market at the floor price of $4.