Price Floor and Welfare Loss
A diagram showing the effects of a price floor set above equilibrium, resulting in excess supply and welfare loss in the market.
demand
Demand Curve: Slopes downward, indicating an inverse relationship between price and quantity demanded.
supply
Supply Curve: Slopes upward, indicating a direct relationship between price and quantity supplied.
price floor
Price Floor (Pf): A legally imposed minimum price above equilibrium, leading to market distortion.
excess supply
Excess Supply: The difference between Qs and Qd — the amount of unsold goods resulting from the price floor.
welfare loss
Welfare Loss: The loss of total surplus due to reduced market efficiency — shown as a shaded triangle.
A price floor is a minimum legal price set by the government, typically above the market equilibrium price.
At the floor price (Pf), quantity supplied (Qs) exceeds quantity demanded (Qd), creating excess supply (surplus).
Firms are willing to supply more, but consumers demand less due to the higher price.
The shaded area represents welfare loss — the loss of allocative efficiency as mutually beneficial trades between Qd and Qe do not occur.
Price floors are commonly used in agricultural markets and labor markets (minimum wage) to protect producers or workers, but can lead to inefficient outcomes.
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