Consumer and producer surplus.
Effect of price floor on consumer surplus.
When a price floor is set above the equilibrium price quantity supplied will exceed quantity demanded and excess supply or surpluses will result.
Price floor is enforced with an only intention of assisting producers.
If price floor is less than market equilibrium price then it has no impact on the economy.
Reasons for setting up price floors.
When government laws regulate prices instead of letting market forces determine prices it is known as price control.
Effects of price floors.
Consumer surplus will only increase as long as the benefit from the lower price exceeds the costs from the resulting shortage.
Further the effect of mandating a higher price transfers some of the consumer surplus to producer surplus while creating a deadweight loss as the price moves upward from the equilibrium price.
Consumer surplus always decreases when a binding price floor is instituted in a market above the equilibrium price.
The total economic surplus equals the sum of the consumer and producer surpluses.
Creates a dead weight loss.
Consumers never gain from the measure.
Consumers are made worse off.
A price floor may lead to market failure if the market is not able to allocate scarce resources in an efficient manner.
To understand how the price floors work you should have an understanding of the following.
If the price floor was set below the equilibrium price then the removal of this price floor would have no effect on producer and consumer surplus.
If the price floor was set above the equilibrium.
The effect of a price floor on consumers is more straightforward.
Typically producers are better off.
The effect of a price floor on producers is ambiguous.
Raises the price of good to the mandated price.
Price floors prevent a price from falling below a certain level.
The result is a surplus of the good due to unsold goods.
They may be worse off or no different.
But if price floor is set above market equilibrium price immediate supply surplus can be observed.
Reduces the quantity produced and consumed.
However price floor has some adverse effects on the market.
This has the effect of binding that good s market.
