Price Floor Effect Producer Surplus

In the price floor graph below the government establishes the price floor at price pmin which is above the market equilibrium.

Price floor effect producer surplus.

When price floor is continued for a long time supply surplus is generated in a huge amount. The deadweight welfare loss is the loss of consumer and producer surplus. But since it is illegal to do so producers cannot do anything. The effect of a price floor on producers is ambiguous.

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. In this case the price floor has a measurable impact on the market. The effect of a price floor on consumers is more straightforward. When government laws regulate prices instead of letting market forces determine prices it is known as price control.

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. When a price floor is set above the equilibrium price quantity supplied will exceed quantity demanded and excess supply or surpluses will result. The total economic surplus equals the sum of the consumer and producer surpluses.

An effective binding price floor causing a surplus supply exceeds demand. 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. Producers may be better off no different or worse off as a result of the measure. This mutual adjustment continues until the price reaches p where producer and consumer decisions are perfectly coordinated.

They may be worse off or no different. Price floors cause a deadweight welfare loss. Price helps define consumer surplus but overall surplus is maximized when the price is pareto optimal or at equilibrium. Suppliers can be worse off.

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. Consumers never gain from the measure. Reasons for setting up price floors. A mandated minimum price for a product in a market.

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. It ensures prices stay high causing a surplus in the market.