Consumer Surplus For Price Floor

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.

Consumer surplus for price floor.

The theory explains that spending behavior varies with the preferences of individuals. The consumer surplus formula is based on an economic theory of marginal utility. Price floors cause a deadweight welfare loss. Consumer surplus always decreases when a binding price floor is instituted in a market above the equilibrium price.

Before the introduction of the price ceiling consumer surplus would be 0 5 200 100 100 5 000. But if price floor is set above market equilibrium price immediate supply surplus can be observed. If there was perfect sorting the consumer surplus would be 3750 after the introduction of a price ceiling this is in the area shaded green labelled a. Price helps define consumer surplus but overall surplus is maximized when the price is pareto optimal or at equilibrium.

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. An effective binding price floor causing a surplus supply exceeds demand. By contrast in the second graph the dashed green line represents a price floor set above the free market price.

In this case the price floor has a measurable impact on the market. When a price floor is set above the equilibrium price quantity supplied will exceed quantity demanded and excess supply or surpluses will result. In contrast consumers demand for the commodity will decrease and supply surplus is generated. At higher market price producers increase their supply.

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