Consumer Surplus In A Price Floor

Consumer surplus is when a consumer derives more benefit in terms of monetary value from a good or service than the price they pay to consume it.

Consumer surplus in a price floor.

When government laws regulate prices instead of letting market forces determine prices it is known as price control. If government implements a price floor there is a surplus in the market the consumer surplus shrinks and inefficiency produces deadweight loss. In case of producer surplus producers would have reduced the price to increase consumers demands and clear off the stock. So government has to intervene and buy the surplus inventories.

The demanders will purchase the quantity where the quantity demanded is equal to the price floor or where the demand curve intersects the price floor line. When price floor is continued for a long time supply surplus is generated in a huge amount. The total economic surplus equals the sum of the consumer and producer surpluses. 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.

Since different people are willing to spend differently on a given good or service a surplus is created. Consumer surplus always decreases when a binding price floor is instituted in a market above the equilibrium price. This metric is used across a wide range of corporate. Price helps define consumer surplus but overall surplus is maximized when the price is pareto optimal or at equilibrium.

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. Technically this is the difference between your maximum willingness to pay for an item and the market price. The consumer surplus formula is based on an economic theory of marginal utility. A price floor may lead to market failure if the market is not able to allocate scarce resources in an efficient manner.

But since it is illegal to do so producers cannot do anything. For example imagine you are going to an electronics store to buy a new flat panel tv. The theory explains that spending behavior varies with the preferences of individuals.