Correct Option
The correct option is Excess Supply
Explanation
A Price is a government-imposed regulation that establishes a minimum price for a specific good or service. It is legally mandated that the price cannot fall below this level. A common example is the Minimum Support Price (MSP) for agricultural produce or Minimum Wage laws.
Analysis of Market Effect
When a Price Floor is set above the equilibrium price, the following market dynamics occur:
- Supply Side: Producers are incentivized by the higher price to increase production, leading to a rise in the Quantity Supplied ($Q_s$).
- Demand Side: Consumers find the good more expensive and reduce their consumption, leading to a fall in the Quantity Demanded ($Q_d$).
- Result: Since the Quantity Supplied exceeds the Quantity Demanded ($Q_s > Q_d$), a surplus is generated in the market. This condition is technically termed Excess Supply.
Conversely, Excess Demand occurs when a price ceiling is set below the equilibrium price, causing shortages. Market Clearing occurs only at the equilibrium price where supply equals demand.
Key Takeaway: A binding Price Floor (set above equilibrium) disrupts market equilibrium by causing the Quantity Supplied to exceed the Quantity Demanded, resulting in Excess Supply (Surplus).