Consumer Surplus For Price Floor

When government laws regulate prices instead of letting market forces determine prices it is known as price control.

Consumer surplus for price floor. Before the introduction of the price ceiling consumer surplus would be 0 5 200 100 100 5 000. If government implements a price floor there is a surplus in the market the consumer surplus shrinks and inefficiency produces deadweight loss. It ensures prices stay high causing a surplus in the market. Price helps define consumer surplus but overall surplus is maximized when the price is pareto optimal or at equilibrium.

In contrast consumers demand for the commodity will decrease and supply surplus is generated. But if price floor is set above market equilibrium price immediate supply surplus can be observed. 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.

An effective binding price floor causing a surplus supply exceeds demand. At higher market price producers increase their supply. The consumer surplus formula is based on an economic theory of marginal utility. When a price floor is set above the equilibrium price quantity supplied will exceed quantity demanded and excess supply or surpluses will result.

In this case the price floor has a measurable impact on the market. The theory explains that spending behavior varies with the preferences of individuals. Consumer surplus always decreases when a binding price floor is instituted in a market above the equilibrium price. Price floors cause a deadweight welfare loss.

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.