Graphically, whats the total consumer surplus?
Area below the demand curve but above the price
How does rise in price affect consumer surplus?
Decreases it
Graphically, what’s the total producer surplus?
The area above the supply curve but below the price
How does a rise in price affect producer surplus?
Increases it
(but different for each individual producer)
Attempts to create another arrangement which produces a higher total surplus [3]
- Reallocate consumption among consumers
- Reallocate sales among sellers
- Change the quantity traded
Do any of these alternatives work?
No. they all ultimately decrease total surplus
Why does reallocating consumption among consumers fail?
you would be taking away from a person who values it more and is therefore willing to pay to give to someone who values it less
–> decreases consumer surplus
Why does reallocating sales among sellers fail?
Takes sellers away from sellers who would’ve sold their books at market equilibrium to compel those who would not have sold their prices
–> Thus producer surplus is decreased
Why does changing the quantity traded fail?
If u try to trade more or less goods than the market eq quantity, less transactions will occur
–> Thus total surplus is decreased
An efficient market … [4]
- Allocates consumption of the good to the potential buyer who will pay the most
- Allocates sales to seller who have the lowest cost
- Ensures that every consumer values the good sold more than the producers so that all transactions are mutually beneficial
- Ensures that every potential buyer who doesn’t purchase values the good less than any seller who doesn’t make the sale
Why do markets work so well?
- Property rights
- Economic signals
What causes market failure?
- Market power / monopoly
- Externalities
[When actions have side effects on the welfare of others, such as pollution as a negative byproduct for many of the goods sold in markets] - Public goods, common resources
- Insider info
What happens when governments intervene in markets?
They defy the principle that markets move towards equilibrium
Assumption when handling price floors and ceilings
- Markets in question were efficient pre price controls
When is a price ceiling binding?
When the price ceiling is below the equilibrium price
Whats the issue (graphically) with price ceilings?
Lower price makes it so that producers have less incentive to sell (reduces supply) but demand is still increasingly high
Do price ceilings lead to shortages or surplus?
Shortages
Inefficiencies Caused by Price Ceilings [4]
- Inefficiently low quantity traded
- Inefficient allocation of resources
- Wasted resources
- Lower quality of goods
Innefficiently low quantity
- with price ceilings, total surplus decreases
- DWL increases since beneficial transactions aren’t taking place
Inefficient allocation of resources
- those that are more desperate for a good would be willing to pay more but they cant bc of price ceilings
- so the distribution of goods is random at best
Waste of resources
In particular time and effort looking for the newly scarce goods
Lower quality goods
Sellers offer low-quality goods at a low price (bc they literally cant) though byers would rather have a higher quality product and pay a higher price
Why price controls then?
- Benefit SOME people
- Might be hard to get rid of them if they’ve been there for too long
- Gov officials don’t understand econ
When is a price floor binding?
When the eq price is lower than the one set
