Explain what is consumer surplus, producer surplus and total surplus. Show graphically how a price floor...

Explain what is consumer surplus, producer surplus and total surplus. Show graphically how a price floor reduces total surplus.

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Solution,

Consumer surplus is the difference between the market price of good and willingness to pay for good by the consumer. willingness to pay is the demand curve.

Producer surplus is the difference between the willingness to accept for a good and price of the good. willingness to accept is the supply curve of good.

Consumer Surplus (C.S) and Producer surplus (P.S) in the above diagram.

Total surplus is the sum of producer surplus and consumer surplus

Total Surplus = Consumer Surplus + Producer Surplus

if the price floor is applied to the market

price is higher than the equilibrium market.

if the price is higher than the equilibrium price than consumer surplus will decrease and producer surplus increases.

Deadweight loss - DWL is the part which is decrease form total surplus.

Rahul Sunny answered 1 year ago

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