Which area on a standard supply and demand graph represents the deadweight loss caused by a binding price floor?

• A. The area between the supply and demand curves from the quantity demanded to the quantity supplied at the price floor
• B. The area below the demand curve and above the price floor up to the equilibrium quantity
• C. The area between the supply and demand curves from zero to the equilibrium quantity
• D. The area above the supply curve and below the price floor up to the equilibrium quantity

Answer: (A)

Verified step by step guidance

1. Step 1: Understand what a binding price floor is. A binding price floor is a minimum price set above the equilibrium price, which causes a surplus because the quantity supplied exceeds the quantity demanded at that price.
2. Step 2: Identify the quantities involved. At the price floor, find the quantity demanded (Qd) and the quantity supplied (Qs) on the graph. Since the price floor is above equilibrium, Qs > Qd, creating excess supply.
3. Step 3: Recognize that deadweight loss (DWL) represents the loss of total surplus due to the market not clearing. It is the value of trades that would have occurred between Qd and Qs but do not happen because of the price floor.
4. Step 4: Locate the deadweight loss area on the graph. It is the triangular area between the supply and demand curves, bounded horizontally between Qd and Qs, and vertically between the supply and demand curves at those quantities.
5. Step 5: Conclude that the deadweight loss is the area between the supply and demand curves from the quantity demanded to the quantity supplied at the price floor, representing lost gains from trade.