Unit 2 – Demand and Supply
Price Controls &
Consumer Surplus
Quiz on all of this is Friday:
What do you need to do?
- Make sure you have read Ch. 3 and p. 85 90 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.
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
Shortages
0
Qc
D
Qe
Q
Example: rent
control in NYC.
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
Qe
Qf
Q
Market doesn’t
achieve allocative
efficiency.
Example: wheat
prices after World
War I.
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
Q1
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 the sum of consumer surplus and producer surplus.
P
S
Consumer Surplus
+
Producer Surplus
= Total Surplus
Pe
D
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 light and
dark triangles
minus the
checkered one.
Notice: Quotas also take a away from total surplus and cause
deadweight loss.
P
S
Pe
D
0
Qc
Qe
Q