Consumer Surplus For Price Floor

At higher market price producers increase their supply.

Consumer surplus for price floor.

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. 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. When a price floor is set above the equilibrium price quantity supplied will exceed quantity demanded and excess supply or surpluses will result.

Price floors cause a deadweight welfare loss. But if price floor is set above market equilibrium price immediate supply surplus can be observed. A deadweight welfare loss occurs whenever there is a difference between the price the marginal demander is willing to pay and the equilibrium price. 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.

Before the introduction of the price ceiling consumer surplus would be 0 5 200 100 100 5 000. The consumer surplus formula is based on an economic theory of marginal utility. In contrast consumers demand for the commodity will decrease and supply surplus is generated. It ensures prices stay high causing a surplus in the market.

The deadweight welfare loss is the loss of consumer and producer surplus. Price helps define consumer surplus but overall surplus is maximized when the price is pareto optimal or at equilibrium. The theory explains that spending behavior varies with the preferences of individuals. The total economic surplus equals the sum of the consumer and producer surpluses.

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