Question

In 1 or 2 sentences, explain the effect of a price floor on the quantity of a good.

Answer 1

It creates demand shortage. Demand shortage, in turn, creates supply shortage which causes a decrease in prices or producers will exit the market.

Answer 2

A price floor is the lowest legal price that a good can be sold at, and this is usually used by a government to prevent prices from being too low. The problem with instituting a price floor is that this can create a demand shortage, which in turn can produce a supply shortage. Eventually, this leads to a drop in price that causes producers to exit the market.