Unit 2A – Demand and Supply
Price Controls &
Consumer Surplus
Price Ceilings: The government sets a maximum price. It is only an
“effective” price ceiling if it is set below equilibrium price.
P
S
Effective price ceilings
appear at the bottom
of the graph (below
equilibrium price).
Pe
Pc
D
0
Qe
Q
Price Ceilings: What is the immediate effect of a price ceiling?
P
S
Effective price ceilings
appear at the bottom
of the graph (below
equilibrium price).
Pe
Pc
Shortages
0
Qc
D
Qe
Q
Price Ceilings: What are the long term effects of a price ceiling?
P
Rationing Problem
S
Black Markets
Suppliers allocate
too few resources
to the product.
Pe
Market doesn’t
achieve allocative
efficiency.
Pc
Examples.
Shortages
0
Qc
D
Qe
Q
Price Floors: The government sets a minimum price. It is only an
“effective” price floor if it is set above equilibrium price.
P
S
Pf
Effective price floors
appear at the top of
the graph (above
equilibrium price).
Pe
D
0
Qe
Q
Price Floors: What is the immediate effect of a price floor?
Surpluses
P
S
Pf
Effective price floors
appear at the top of
the graph (above
equilibrium price).
Pe
D
0
Qe
Qf
Q
Price Floors: What are the long term effects of a price floor?
Surpluses
P
Govt. needs to do
something with the
surplus.
S
Pf
Taxpayers end up
paying for it.
Pe
Suppliers allocate
too many resources
to the product.
D
0
Market doesn’t
achieve allocative
efficiency.
Examples.
Qe
Qf
Q
Quantity Controls: The government sets a maximum quantity or
quota. An effective quantity control must be less than equilibrium
quantity.
P
S
Effective quantity
controls appear at the
left of the graph
(below equilibrium
quantity).
Pe
D
0
Qe
Q
Consumer Surplus: the difference between the amount consumers
were willing to pay for a product and the amount they had to pay
(the price).
Consumer Surplus
P
S
To find consumer surplus
on a graph, look for the
area above the price, and
below the demand curve.
Pe
D
0
Qe
Q
Producer Surplus: the difference between the amount producers were
willing to sell the product for and the amount the actually got (the
price).
P
Producer Surplus
S
To find producer surplus
on a graph, look for the
area below the price, and
above the supply curve.
Pe
D
0
Qe
Q
Total Surplus: is equal to consumer surplus plus producer surplus.
P
S
Consumer Surplus
+
Producer Surplus
= Total Surplus
Pe
D
0
Qe
Q
Notice: Last thought on consumer and producer surplus: they
don’t have to be equal. It depends on the slope of the demand
and supply curves.
P
Consumer Surplus
S
Pe
Producer Surplus
0
Qe
D
Q
Notice: Last thought on consumer and producer surplus: they
don’t have to be equal. It depends on the slope of the demand
and supply curves.
P
Consumer Surplus
S
Pe
D
Producer Surplus
0
Qe
Q
Notice: Price Ceilings take away from total surplus.
(mostly from producer surplus, which makes sense).
P
S
Pe
Pc
D
0
Qc
Qe
Q
This area of lost
surplus is called
deadweight loss.
It represents
mutually
beneficial
transactions that
buyers and
sellers would like
to have made,
but could not.
Notice: Price floors take away from total surplus.
P
S
Pf
Pe
0
Qe
Qf
Q
This area of lost
surplus is called
deadweight loss.
It represents
transactions that
buyers would
not voluntarily
make, but
happened
anyway. Total
surplus is now
D the green and
orange triangles
minus the red
one.
Notice: Quotas also take a away from total surplus and cause
deadweight loss.
P
S
Pe
D
0
Qc
Qe
Q
Price
$300
S
200
100
0
D
100
300
200
Quantity of Textbooks
What do you need to do?
- Make sure you have read Ch. 3 and the Ch.
3 Web packet in their entirety.
- As you read, write down any questions that
you have. Anything that doesn’t make sense, you
have to try to figure out, or you have to ask about
in class the next day.
- Do the assigned study questions. We don’t
usually review them. Sometimes I don’t talk
about the exact same things, but I am assuming
you understand them and the concepts behind
them.