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.

When government laws regulate prices instead of letting market forces determine prices it is known as price control. It ensures prices stay high causing a surplus in the market. But if price floor is set above market equilibrium price immediate supply surplus can be observed. If government implements a price floor there is a surplus in the market the consumer surplus shrinks and inefficiency produces deadweight loss.

Before the introduction of the price ceiling consumer surplus would be 0 5 200 100 100 5 000. By contrast in the second graph the dashed green line represents a price floor set above the free market price. In contrast consumers demand for the commodity will decrease and supply surplus is generated. Price helps define consumer surplus but overall surplus is maximized when the price is pareto optimal or at equilibrium.

A deadweight welfare loss occurs whenever there is a difference between the price the marginal demander is willing to pay and the equilibrium price. An effective binding price floor causing a surplus supply exceeds demand. 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.

The consumer surplus formula is based on an economic theory of marginal utility. Price floors cause a deadweight welfare loss. The theory explains that spending behavior varies with the preferences of individuals. 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.

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