Consumer Surplus For Price Floor

When a price floor is set above the equilibrium price quantity supplied will exceed quantity demanded and excess supply or surpluses will result.

Consumer surplus for price floor.

But if price floor is set above market equilibrium price immediate supply surplus can be observed. Consumer surplus always decreases when a binding price floor is instituted in a market above the equilibrium price. In this case the price floor has a measurable impact on the market. At higher market price producers increase their supply.

Before the introduction of the price ceiling consumer surplus would be 0 5 200 100 100 5 000. It ensures prices stay high causing a surplus in the market. When government laws regulate prices instead of letting market forces determine prices it is known as price control. The theory explains that spending behavior varies with the preferences of individuals.

Price floors cause a deadweight welfare loss. The total economic surplus equals the sum of the consumer and producer surpluses. If government implements a price floor there is a surplus in the market the consumer surplus shrinks and inefficiency produces deadweight loss. Price helps define consumer surplus but overall surplus is maximized when the price is pareto optimal or at equilibrium.

In contrast consumers demand for the commodity will decrease and supply surplus is generated. Consumer surplus is an economic measurement to calculate the benefit i e surplus of what consumers are willing to pay for a good or service versus its market price. By contrast in the second graph the dashed green line represents a price floor set above the free market price. The consumer surplus formula is based on an economic theory of marginal utility.

The deadweight welfare loss is the loss of consumer and producer surplus.