In a perfectly competitive market, the equilibrium price and quantity represent the most efficient operation of that market. Optimum efficiency means that 1) sellers cannot be made better off without, at the same time, making buyers worse off, and 2) that buyers cannot be made better off, without making the sellers worse off. This assignment presents a scenario in which a government tries to improve the financial position of the sellers, in such a perfectly competitive market, by instituting a legal price floor that is significantly above the equilibrium price. A price floor is the lowest price for which a seller can legally sell the product.
Focus on calculating the consumer surplus, producer surplus, and total surplus both before a price floor is established and after a price, the floor is enacted. Demonstrate an understanding of the impact on the entire economy, based on any changes in taxes required, if the government is to purchase any extra product that is not sold to consumers.
