Chapter 7

Price ceilings : define, graph, calculate effect on quantity demanded, quantity supplied, consumer/producer surplus, and efficiency

Price ceilings: a maximum legal price for an output, and is sometimes referred to as price cap. A binding price ceiling is one that is established below the equilibrium price; it prevents price from rising above the ceiling price. Price ceiling set above equilibrium price is not binding. When quantity demanded exceeds quantity supplied there is a market shortage= quantity demanded- q supplied Consumer surplus= area of triangle acb+ area of rectangle bcgf Producer surplus= area fgh (remainder of consumer surplus) Total surplus=area acgh

Price floors: define, graph, calculate effect on quantity demanded, quantity supplied, consumer/producer surplus, and efficiency

Price floor: a minimum legal price for an input or output and is sometimes referred to as a price support. A binding price floor is one that is established above the equilibrium price; it prevents price from falling below the price floor A price floor set below the equilibrium price is not binding because it does not prevent equilibrium from being attained ex: minimum wage In a labor market, a surplus means unemployment Consumer surplus= area of a triangle acb Producer surplus= area of triangle fgh+ area of rectangle bcgf Total Surplus= area acgh