Economic Surplus With 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.

Economic surplus with price floor.

However price floor has some adverse effects on the market. A price floor is a government or group imposed price control or limit on how low a price can be charged for a product good commodity or service. The consumer surplus formula is based on an economic theory of marginal utility. The equilibrium price commonly called the market price is the price where economic forces such as supply and demand are balanced and in the absence of external.

If price floor is less than market equilibrium price then it has no impact on the economy. In a world without the price ceiling we have assuming away external costs and external benefits. Price floor is enforced with an only intention of assisting producers. But the price floor p f blocks that communication between suppliers and consumers preventing them from responding to the surplus in a mutually appropriate way.

Price floors are used by the government to prevent prices from being too low. The most common price floor is the minimum wage the minimum price that can be payed for labor. The result is that the quantity supplied qs far exceeds the quantity demanded qd which leads to a surplus of the product in the market. The theory explains that spending behavior varies with the preferences of individuals.

Consumers are clearly made worse off by price floors. In the price floor graph below the government establishes the price floor at price pmin which is above the market equilibrium. But if price floor is set above market equilibrium price immediate supply surplus can. Suppliers can be worse off.

This article attempts to discuss the effects of a price ceiling on the economic surplus the reference point for studying these effects is a world without the price ceiling where the price is the market price and the quantity traded is the equilibrium quantity traded at that market price. A price floor is an established lower boundary on the price of a commodity in the market. Price floors are also used often in agriculture to try to protect farmers. They are forced to pay higher prices and consume smaller quantities than they would with free market.

A price floor must be higher than the equilibrium price in order to be effective.