Download Binding price floors typically cause excess supply and

Binding price floors typically cause excess supply and decreased total
economic surplus.
LEARNING OBJECTIVE [ edit ]
Show how price floors contribute to market inefficiency
KEY POINTS [ edit ]
A price floor is economically consequential if it is greater than the free­market equilibrium price.
Price floors lead to a surplus of the product.
Supply surplusses created by price floors are generally added to producer's inventory or are
purchased by governments.
Consumer surplus is the gain obtained by consumers because they can obtain a product for a
lower price than they would be willing to pay.
Producer surplus is the benefit producers get by selling at a price higher than the lowest price
they would sell for.
TERMS [ edit ]
free­market equilibrium price
The price established through competition such that the amount of goods or services sought by
buyers is equal to the amount of goods or services produced by sellers
price floor
A mandated minimum price for a product in a market.
Give us feedback on this content: FULL TEXT [ edit ]
A price floor will only impact the market if it is greater than thefree­market equilibrium
price. If the floor is greater than the economic price, the immediate result will be a supply
surplus. As you can see from , a higher
base price will lead to a higher quantity
supplied. However, quantity demand will
decrease because fewer people will be
willing to pay the higher price. This will
lead to a surplus of supply. Register for FREE to stop seeing ads
Surplus from Price Floor
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Price
Surplus
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Quantity
Surplus from a price floor
If a price floor is set above the free­market equilibrium price (as shown where the supply and demand
curves intersect), the result will be a surplus of the good in the market.
A price floor will also lead to a more inefficient market and a decreased total economic
surplus. Economic surplus, or totalwelfare, is the sum of consumer and producer surplus.
Consumer surplus is the monetary gain obtained by consumers because they are able to
purchase a product for a price that is less than the highest that they are willing pay. Producer
surplus is the amount that producers benefit by selling at a market price that is higher than
the least they would be willing to sell for. An effective price floor will raise the price of a good,
which means that the the consumer surplus will decrease. While the effective price floor will
also increase the price for producers, any benefit gained from that will be minimized by
decreased sales caused by decreased demand from consumers due to the increase in price.
This translates into a net decrease total economic surplus, otherwise known as deadweight
loss.
Since well designed price floors create surpluses, the big issue is what to do with the excess
supply. The first option is to let inventories grow and have the private producers bear
the costof storing it. The other option is for the government that set the price floor to
purchase the excess supply and store it on its own. The government could then sell the
surplus off at a loss in times of a food shortage.