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.

The current equilibrium is 8 per movie ticket with 1 800 people attending movies. The original consumer surplus is g h j and producer surplus is i k. Consumers are clearly made worse off by price floors. This happens when government puts into place a price floor.

Price floors are used by the government to prevent prices from being too low. 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. Government set price floor when it believes that the producers are receiving unfair amount. Price floor is enforced with an only intention of assisting producers.

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. Suppliers can be worse off. Figure 2 b shows a price floor example using a string of struggling movie theaters all in the same city. Remember hearing stories about the government paying farmers to not grow crops.

When the government removes a binding price floor. Price floors transfer consumer surplus to producers. 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.

Quantity demanded will increase and quantity supplied will decrease. Price floors cause surpluses. 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. Think of an auction where a buyer holds in his mind a price limit.

The price floors are established through minimum wage laws which set a lower limit for wages. Another good example to explain a price floor would be the agriculture market. However price floor has some adverse effects on the market. It is an implicit tax on producers and an implicit subsidy to consumers.

If price floor is less than market equilibrium price then it has no impact on the economy. Price floors are also used often in agriculture to try to protect farmers. Efficiency and price floors and ceilings. Any employer that pays their employees less than the specified.

They are forced to pay higher prices and consume smaller quantities than they would with free market. A consumer surplus occurs when the price for a product or service is lower than the highest price a consumer would willingly pay. Price ceiling a price ceiling is a government set price below market equilibrium price.