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.

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 always decreases when a binding price floor is instituted in a market above the equilibrium price. A deadweight welfare loss occurs whenever there is a difference between the price the marginal demander is willing to pay and the equilibrium price. In contrast consumers demand for the commodity will decrease and supply surplus is generated.

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. The theory explains that spending behavior varies with the preferences of individuals. It ensures prices stay high causing a surplus in the market.

At higher market price producers increase their supply. Price helps define consumer surplus but overall surplus is maximized when the price is pareto optimal or at equilibrium. The total economic surplus equals the sum of the consumer and producer surpluses. By contrast in the second graph the dashed green line represents a price floor set above the free market price.

The deadweight welfare loss is the loss of consumer and producer surplus. Price floors cause a deadweight welfare loss. An effective binding price floor causing a surplus supply exceeds demand. 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.