Consumer Surplus In A Price Floor

The theory explains that spending behavior varies with the preferences of individuals.

Consumer surplus in a price floor.

A few crazy things start to happen when a price floor is set. When price floor is continued for a long time supply surplus is generated in a huge amount. If government implements a price floor there is a surplus in the market the consumer surplus shrinks and inefficiency produces deadweight loss. For example imagine you are going to an electronics store to buy a new flat panel tv.

Technically this is the difference between your maximum willingness to pay for an item and the market 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. First of all the price floor has raised the price above what it was at equilibrium so the demanders consumers aren t willing to buy as much quantity. A price floor may lead to market failure if the market is not able to allocate scarce resources in an efficient manner.

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. 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. When a price floor is set above the equilibrium price quantity supplied will exceed quantity demanded and excess supply or surpluses will result. The consumer surplus formula is based on an economic theory of marginal utility.

So government has to intervene and buy the surplus inventories. Consumer surplus always decreases when a binding price floor is instituted in a market above the equilibrium price. Since different people are willing to spend differently on a given good or service a surplus is created. The total economic surplus equals the sum of the consumer and producer surpluses.

But since it is illegal to do so producers cannot do anything. Price helps define consumer surplus but overall surplus is maximized when the price is pareto optimal or at equilibrium. 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.