In a market economy, price is determined by the interaction between supply and demand. When demand is high the price increases, when demand is low the price decreases. Thus, there is an equilibrium price at which transactions are optimally executed. When the government sets a price floor, equilibrium price efficiency is affected as the economy starts to function outside the patterns of interaction between demand and supply. On the supplier side, this will be a stimulus for increased production as the profit margin will be higher. On the consumer side, this will be a disincentive, as the price will be higher than the market price ($ 4). Thus, demand tends to decrease. Therefore, artificial price increases will lead to increased supply and decreased demand.
