In a price floor scenario, for the policy to be effective, it must be set above what price?

In the context of a price floor, the effective implementation of this economic policy requires that it be set above the equilibrium price. The equilibrium price is the price at which the quantity of a good supplied is equal to the quantity demanded, so setting a price floor above this level creates a minimum selling price enforced by law.

When the price floor is set above the equilibrium price, it prevents sellers from lowering their prices in response to a decrease in demand, leading to a surplus of goods because producers are willing to supply more at the higher price, but consumers are not willing to purchase as much. This is critical for the price floor to serve its intended purpose, such as to protect producers' incomes in agricultural markets or to keep wage levels for labor above a certain minimum.

If the price floor is set below the equilibrium price, it would have no effect, as the market price would naturally remain above the floor level, allowing the normal supply-demand dynamics to operate without interference. Thus, setting the price floor correctly above the equilibrium price is essential for achieving the policy's goals.