They may be worse off or no different.
Effect of price floor on consumer surplus.
When a price floor is set above the equilibrium price quantity supplied will exceed quantity demanded and excess supply or surpluses will result.
Consumers never gain from the measure.
The result is a surplus of the good due to unsold goods.
Typically producers are better off.
The effect of a price floor on producers is ambiguous.
Producers may be better off no different or worse off as a result of the measure.
Reasons for setting up price floors.
Supply and demand analysis.
The effect of a price floor on consumers is more straightforward.
Price floors prevent a price from falling below a certain level.
This has the effect of binding that good s market.
If price floor is less than market equilibrium price then it has no impact on the economy.
But if price floor is set above market equilibrium price immediate supply surplus can be observed.
The government is inflating the price of the good for which they ve set a binding price floor which will cause at least some consumers to avoid paying that price.
Effects of price floors.
Price floor is enforced with an only intention of assisting producers.
If the price floor was set below the equilibrium price then the removal of this price floor would have no effect on producer and consumer surplus.
However price floor has some adverse effects on the market.
To understand how the price floors work you should have an understanding of the following.
Creates a dead weight loss.
The total economic surplus equals the sum of the consumer and producer surpluses.
Reduces the quantity produced and consumed.
Consumer and producer surplus.
Consumer surplus will only increase as long as the benefit from the lower price exceeds the costs from the resulting shortage.
If the price floor was set above the equilibrium.
A price floor may lead to market failure if the market is not able to allocate scarce resources in an efficient manner.
When government laws regulate prices instead of letting market forces determine prices it is known as price control.
Raises the price of good to the mandated price.
