The Market

Effects of a Change in Demand •When demand shifts left •When demand shifts right

- the equilibrium price and quantity will fall - the equilibrium price and quantity will rise.

Effects of a Change in Supply •When supply shifts left •When supply shifts right

- the equilibrium price will rise and the equilibrium quantity will fall. - the equilibrium price will fall and the equilibrium quantity will rise.

Efficiency

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total surplus

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Consumer Surplus

Consumer surplus is the area below the demand curve but above the actual price paid. Consumer surplus is the difference between the amount consumers are willing to pay and the amount they have to pay for a good. Lower market prices increase the amount of consumer surplus in the market.

Equilibrium

Equilibrium occurs at the intersection of demand and supply.

Producer Surplus

Producer surplus is the area below the the actual price paid but above the supply curve. Producer surplus is the difference between the amount producers are willing to sell for and the amount they do sell a good for. Higher market prices increase the amount of producer surplus in the market

externalities

are external coasts or external benefits that fall on bystanders

positive externalities

external benefits

negative externalities

external costs

price ceiling

is a maximum price allowed by law

price floors

is a minimum price allowed by law

subsidies

is a reverse tax

surpluses

is a situation in which the quantity supplied is greater than the quantity demanded

total consumer surplus

is measuered by the area beneath the demand curve and above the price

Consumer surplus

is the consumers gain from exchange, or the difference between the max price a consumer is willing to pay for a certain quantity and the market price

deadweight loss

is the total of lost consumers and producer surplus when not all mutually profitable gains from trade are exploited. price ceilings create a deadweight loss the lost gain from trade ticket 50 you willing to pay 60 but tax makes it 70 you dont go any more you lose 10 of surplus consumer and gov doesnt gain tax or anything

shortage

when price are held below the market price, the quantity demanded exceeds the quantity supplied

price ceilings info

•A price ceiling establishes a maximum price that sellers are legally permitted to charge. •Example: rent control •When a price ceiling keeps the price of a good below the market equilibrium, there will be both direct and indirect effects. •(Direct effect) A shortage: the quantity demanded will exceed the quantity supplied. Waiting lines may develop. •(Indirect effects) Quality deterioration and changes in other non-price factors that are favorable to sellers & unfavorable to buyers. •The quantity exchanged will fall and the gains from trade will be less than if the good were allocated by markets.

price floors info

•A price floor establishes a minimum legal price for the good or service. •Example: minimum wage •When a price floor keeps the price of a good above the market equilibrium, it will lead to both direct and indirect effects. •(Direct effect) A surplus: sellers will want to supply a larger quantity than buyers are willing to purchase. •(Indirect effects) Changes in non-price factors that are favorable to buyers and unfavorable to sellers. •The quantity exchanged will fall and the gains from trade will b