<P> A price floor can be set below the free - market equilibrium price . In the first graph at right, the dashed green line represents a price floor set below the free - market price . In this case, the floor has no practical effect . The government has mandated a minimum price, but the market already bears a higher price . </P> <P> By contrast, in the second graph, the dashed green line represents a price floor set above the free - market price . In this case, the price floor has a measurable impact on the market . It ensures prices stay high so that product can continue to be made . </P> <P> A price floor set above the market equilibrium price has several side - effects . Consumers find they must now pay a higher price for the same product . As a result, they reduce their purchases or drop out of the market entirely . Meanwhile, suppliers find they are guaranteed a new, higher price than they were charging before . As a result, they increase production . </P> <P> Taken together, these effects mean there is now an excess supply (known as a "surplus") of the product in the market to maintain the price floor over the long term . The equilibrium price is determined when the quantity demanded is equal to the quantity supplied . </P>

Effects of price floor on demand and supply