What is the name given to the price set below the equilibrium point by the government?
The name given to the price set below the equilibrium point by the government is called a price floor. A price floor is a government-imposed minimum price that is set above the equilibrium price in a market.
To understand why a price floor is set below the equilibrium point, we first need to understand what the equilibrium price is. The equilibrium price is the price at which the quantity of a good or service demanded by buyers is equal to the quantity supplied by sellers. In other words, it's where the demand and supply curves intersect.
Now, when the government sets a price floor below the equilibrium point, it means that they are requiring the price of a good or service to remain above a certain minimum level. This is done with the intention of protecting certain producers or industries.
For example, let's say the equilibrium price of a certain agricultural product is $5 per unit. To support farmers, the government might set a price floor of $8 per unit, ensuring that farmers receive a higher price for their produce.
However, this price floor can lead to some consequences. When the price floor is set above the equilibrium, the quantity supplied exceeds the quantity demanded, resulting in a surplus. In the example above, if farmers are required to sell their products for $8 per unit, but consumers are only willing to buy at the equilibrium price of $5, a surplus of the agricultural product is likely to occur.
Understanding the concept of price floors and equilibrium helps us grasp the impact of government interventions in markets and the possible outcomes they can create.