Price Floor Effect Producer Surplus

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.

Price floor effect producer surplus.

So government has to intervene and buy the surplus inventories. In case of producer surplus producers would have reduced the price to increase consumers demands and clear off the stock. Consumer surplus always decreases when a binding price floor is instituted in a market above the equilibrium price. It ensures prices stay high causing a surplus in the market.

When government laws regulate prices instead of letting market forces determine prices it is known as price control. They may be worse off or no different. This analysis shows that a price ceiling like a law establishing rent controls will transfer some producer surplus to consumers which helps to explain why consumers often favor them. Price helps define consumer surplus but overall surplus is maximized when the price is pareto optimal or at equilibrium.

An effective binding price floor causing a surplus supply exceeds demand. The deadweight welfare loss is the loss of consumer and producer surplus. In this case the price floor has a measurable impact on the market. Consumers never gain from the measure.

A mandated minimum price for a product in a market. The effect of a price floor on consumers is more straightforward. This mutual adjustment continues until the price reaches p where producer and consumer decisions are perfectly coordinated. Suppliers can be worse off.

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. The effect of a price floor on producers is ambiguous. A deadweight welfare loss occurs whenever there is a difference between the price the marginal demander is willing to pay and the equilibrium price. But since it is illegal to do so producers cannot do anything.

By contrast in the second graph the dashed green line represents a price floor set above the free market price. The total economic surplus equals the sum of the consumer and producer surpluses. In the price floor graph below the government establishes the price floor at price pmin which is above the market equilibrium. In effect the price floor causes the area h to be transferred from consumer to producer surplus but also causes a deadweight loss of j k.

Price floors cause a deadweight welfare loss. Producers may be better off no different or worse off as a result of the measure.