If a good has a price floor set above the equilibrium price and demand decreases, the following will happen in the market:
- Price in the Market: The price will remain at the price floor level because the floor is binding-prices cannot legally fall below this minimum level set by the government. Thus, even though demand decreases, the price does not drop to the new equilibrium price, which would be lower without the floor
- Quantity Produced and Sold: At the price floor, producers are willing to supply a higher quantity than consumers demand, creating a surplus. When demand decreases, consumer willingness to buy at the price floor further declines, reducing the quantity demanded even more. Producers may still supply a large quantity due to the high price, but the actual quantity sold will be limited by the lower demand, increasing the surplus or excess supply in the market
In summary, with a binding price floor above equilibrium and a decrease in demand, the market experiences:
- A constant price at the floor level (above equilibrium),
- A decrease in quantity demanded,
- An increase in surplus (excess supply),
- Potential inefficiencies and welfare loss due to misallocation of resources
