Price Floor Effect Producer Surplus

The effect of a price floor on consumers is more straightforward.

Price floor effect producer surplus.

This mutual adjustment continues until the price reaches p where producer and consumer decisions are perfectly coordinated. Suppliers can be worse off. Price floors cause a deadweight welfare loss. In this case the price floor has a measurable impact on the market.

The deadweight welfare loss is the loss of consumer and producer surplus. It ensures prices stay high causing a surplus in the market. An effective binding price floor causing a surplus supply exceeds demand. But since it is illegal to do so producers cannot do anything.

The total economic surplus equals the sum of the consumer and producer surpluses. Producers may be better off no different or worse off as a result of the measure. 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. A deadweight welfare loss occurs whenever there is a difference between the price the marginal demander is willing to pay and the equilibrium price.

They may be worse off or no different. In case of producer surplus producers would have reduced the price to increase consumers demands and clear off the stock. In the price floor graph below the government establishes the price floor at price pmin which is above the market equilibrium. When a price floor is set above the equilibrium price quantity supplied will exceed quantity demanded and excess supply or surpluses will result.

By contrast in the second graph the dashed green line represents a price floor set above the free market price. Consumers never gain from the measure. When price floor is continued for a long time supply surplus is generated in a huge amount. 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.

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. Consumer surplus always decreases when a binding price floor is instituted in a market above the equilibrium price. Price helps define consumer surplus but overall surplus is maximized when the price is pareto optimal or at equilibrium. When government laws regulate prices instead of letting market forces determine prices it is known as price control.

A mandated minimum price for a product in a market. The effect of a price floor on producers is ambiguous.