Price Floors Eventually Create A Surplus

A surplus occurs when there is more of a supply of a good than is demanded by consumers.

Price floors eventually create a surplus.

This happens when government puts into place a price floor. Price floor is enforced with an only intention of assisting producers. They are forced to pay higher prices and consume smaller quantities than they would with free market. Any employer that pays their employees less than the specified.

Price floors transfer consumer surplus to producers. Price floors cause surpluses. When the government removes a binding price floor. Remember hearing stories about the government paying farmers to not grow crops.

However price floor has some adverse effects on the market. Price floors are used by the government to prevent prices from being too low. Government set price floor when it believes that the producers are receiving unfair amount. Figure 2 b shows a price floor example using a string of struggling movie theaters all in the same city.

It is an implicit tax on producers and an implicit subsidy to consumers. The original consumer surplus is g h j and producer surplus is i k. A price floor could be set at p4 causing a surplus of q3 q0. The most common price floor is the minimum wage the minimum price that can be payed for labor.

The net effect of the price floor in the above activity is that the price floor causes the area h to be transferred from consumer to producer surplus but also causes a deadweight loss of j k. Consumers are clearly made worse off by price floors. For example the uk government set the price floor in the labor market for workers above the age of 25 at 7 83 per hour and for workers between the ages of 21 and 24 at 7 38 per hour. Efficiency and price floors and ceilings.

Do these create shortages or surpluses. Suppliers can be worse off. Another good example to explain a price floor would be the agriculture market. A price floor is the lowest legal price a commodity can be sold at.

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. If price floor is less than market equilibrium price then it has no impact on the economy. A consumer surplus occurs when the price for a product or service is lower than the highest price a consumer would willingly pay. The current equilibrium is 8 per movie ticket with 1 800 people attending movies.

Think of an auction where a buyer holds in his mind a price limit. 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 price floors are established through minimum wage laws which set a lower limit for wages.