policy applications of demand and supply -test 2

surplus (excess supply)

an effective price floor is set above equilibrium price. (the surplus caused by a price floor can be calculated by examining a supply and demand curve or schedule.)

price floors are less common than price ceilings

it is more common to see a price being held below the market price. - there are typically more buyers of goods than there are sellers of goods (political). so when you hold a price below market price, you may benefit, or at least appear to benefit, more buyers, more people, more voter than when you hold the price above the market price, which would appear to harm buyers.

when deadweight loss exists

it is possible for both consumer and producer surplus to be higher, such as in the case of price controls which prevent some suppliers and demanders from transactions they would both be willing to make.

If the government placed a price ceiling on rentals at $1,200, some producer surplus will be lost. A part of that lost producer surplus will be captured by consumers and will become consumer surplus. A second part of the lost producer surplus will become a deadweight loss. Calculate the value of that second part of the lost producer surplus. Note that the quantities (x-axis) are in thousands

lost producer surplus= $7,500,000 (a quantity of 50,000 will be traded where consumers will pay $1,200/rental. without the price ceiling the price would be $1,500 and 100,000 units will be traded.) lost producer surplus= 1/2 x (1,500-1,200) x (100,000-50,000)

the amount that a seller is paid for a good minus the ___ is called producer surplus

sellers actual cost

price floors create 4 significant effects:

surpluses, lost gains from trade, wasteful increases in quality, and misallocation of resources.

the minimum wage (most well know price floor)

- minimum price allowed by law. - it is the price below which it is illegal to buy or sell, you cannot go below the floor.

efficieny

- the familiar demand and supply diagram holds within it the concept of economic efficiency. -economists typically define efficiency as: when it is impossible to improve the situation of one party without imposing a cost on another.

when we have a free market

all of the mutually profitable gains from trade are exploited. (thats another way of saying that a free market maximizes producer plus consumer surplus)

the supply curve shows the quantity that firms are willing to supply at each price.

at $45 firms would still have been willing to supply a quantity of 114 million. those producers who would have been willing to supply the tablets at $45, but who were instead able to charge the equilibrium price of $80, clearly received an extra benefit beyond what they required to supply the product.

the loss in social surplus that occurs when the economy produces at inefficient quantity- it is like money thrown away that benefits no one.

deadweight loss

government policies can create

deadweight loss through taxes and regulations (ex: the US government imposes a per unit tax on alcoholic beverages that collects about $8 billion per year from producers. businesses treat such taxes and regulations as cost. higher cost decrease supply.)

true or false: the concept of deadweight loss applies to tariffs, import quotas, and price controls but does not apply to per unit taxes

false

true or false: a price floor is the highest price that one can legally pay for some good or service

false- it is the lowest price that one can legally pay.

a government imposes price ceilings in order to keep the price of some necessary good or service affordable

for example: in 2005 during Hurricane Katrina, the price of bottled water increase above $5/gal. as a result, many people called for price controls on bottled water to prevent the price from rising so high. In this case the government did not impose a price ceiling.

inefficiecy

if a situation is inefficient it becomes possible to benefit at least one party without imposing costs on others.

deadweight loss occurs whenever a market is not in equilibrium, not just in the case of price controls

in the demand and supply model without externalities

producer surplus

the amount that a seller is paid for a good minus the sellers actual cost it is the area between the market price equilibrium and and the part of the supply curve below the equilibrium

tax incidence

the difference between the price consumers pay and the price producers receives

consider a market for tablet computers

the equilibrium price is $80 and the equilibrium quantity is 28 million. the portion of the demand curve above the equilibrium point and to the left shows that at least some demanders would have been willing to pay more than $80 for a tablet.

although governments can collect tax revenue in the form of per unit tax on output, this creates inefficiency known as deadweight loss because ___

the market is no longer in equilibrium

tax incidence result in

-firms reducing their quantity supplied and consumers reduces their quantity demanded- this results in a lower quantity being both bought and sold on the market, a result of market distortions through per unit taxes. - both consumers and producers could be made better off id government were to eliminate the tax on the good being bought and sold. - in this case, the tax creates deadweight loss bc the market is no longer in equilibrium.

minimum wage

-is a floor price so it will create surpluses - it is the price below which you cannot sell labor, & the suppliers of labor exceed the buyers of labor. - minimum wage creates a surplus of labor

price ceiling

-keeps a price from rising above a certain level (the "ceiling") -legal maximum price that one pays for some good or service.

a supply and demand curve are shown with a price floor at $29. equilibrium price is $14 and equilibrium quantity is 790 pizzas. the quantity demanded at the floor price is 450 pizzas and the quantity supplied is 1200 pizzas. calculate the surplus caused by the price floor.

1200-450=750 pizzas

the table represents the market for tomatoes. suppose there is a price floor set at $67 for a case. calculate the surplus caused by the price floor. $22=650 (supplied)= 1300(demanded) $30=990(S)=990(D) $52=1300(S)=800(D) $67=1450(S)=675(D) $100=1650(S)=400(D)

1450-675= 775 cases of tomatoes

the equilibrium price for rent is $500, and the equilibrium quantity is 15000. suppose a price ceiling is set at $400. in order to calculate the shortage, subtract the quantity supplied from the quantity demanded.

18000-12000= the shortage caused by the price ceiling is 6000 apartments.

A snow storm hits Atlanta in March. The table below represents the market for milk. Suppose there is a price ceiling set at $2.25 per gallon to avoid price gouging. Calculate the shortage caused by the price ceiling. $2.25= 600(S)=4500(D) $3.50=1300(S)=3800(D) $4.75=2500(S)=2500(D) $6=3700(S)=1700(D) $7.25=5500(S)=700(D)

2500 gal/milk

the table below represents the market for bottles of water. suppose there is a price ceiling set at $6/gal. calculate the shortage caused by the price ceiling. $6=2100(S)=4800(D)

2700 gal/water

a supply and a demand curve are shown with a price floor at $8.50. equilibrium price is $5 and equilibrium quantity is 135 baskets of strawberries. the quantity demanded at the price floor is 75 baskets/strawberries and the quantity supplied is 480 baskets/strawberries. calculate the surplus caused by the price floor.

480-75=405 baskets/strawberries

the equilibrium price for European wheat is $3, and the equilibrium quantity is 300 bunches. suppose a price floor is set at $5 a bunch. in order to calculate the surplus, simply subtract the quantity demanded from the quantity supplied

500 minus 100= the surplus of this price floor is 400 bunches of wheat.

A snow storm hits the Southeastern United States in March. The table below represents the market for loaves of bread. Suppose there is a price ceiling set at $5 per loaf to avoid price gouging. Calculate the shortage caused by the price ceiling. $5=3400(S)=6900(D)

6900-3400=3500 loaves/bread

formula for the area of a triangle

A=½bh

true or false: price ceilings are typically enacted in an attempt the keep prices high for those who produce the product.

False ( price ceilings are typically enacted in an attempt to keep prices low for those who demand the product. a price floor is enacted to keep prices high for producers.

why does producer surplus exist?

Some producers are willing to produce at a price that is below the equilibrium price.

consumer surplus

The amount that individuals would have been willing to pay, minus the amount that they actually paid ( the area above the market price and below the demand curve) (the area above the market price and below the demand curve)

efficiency in the demand and supply model

The economy is getting as much benefit as possible from its scarce resources, and all the possible gains from trade have been achieved (optimal amount of each good and service is produced and consumed)

shortage (excess demand)

a price ceiling keeps the price of a good from rising above a set maximum. an effective price ceiling is set below equilibrium price. this causes a shortage.

in the demand and supply model without extrenalities

efficiency occurs at market equilibrium.

a price floor will usually tend to create _ when the price floor is set above the market price?

excess supply (a price floor will tend to create conditions of excess supply as a result of the misalignment in the market forces of more supply produced than demanded at this higher price. is price is set above equilibrium, quantity demand decreases while quantity supplied increases, causing a shortage to exist in the market.)

per unit taxes create deadweight loss by

increasing the cost of production and prohibits mutually beneficial trade from occurring. DWL exists whenever a market without externalities is not in equilibrium. (in the case of taxes, the equilibrium price might be $10. however when the government imposes a per unit tax on output, say in the form a $1 tax on each unit of output produced, also know as and excise tax, each unit of outcome becomes $1 more expensive to produce.)

the classic case of the price floor (paradigmatic)

is the exception which proves the rule. bc the classic case of a price floor is a good for which there are more sellers than there are buyers. here is the case where the price is kept above the market price, and it makes sense politically because there are lots of sellers compared to buyers.

price floor

keeps a price from falling below a given level (the "floor")

price controls

laws that government enact to regulate prices. (two flavors: price ceiling and price floor"

social/economic/total surplus

the sum of consumer surplus and producer surplus - it is larger at equilibrium quantity and price than it would be at any other quantity. - at the effective level of output it is impossible to produce greater consumer surplus w/o reducing producer surplus, -and it is impossible to produce greater surplus w/o reducing consumer surplus

as long as the price the consumers are willing to pay exceeds the price that sellers are willing to accept

there are mutually profitable trades that can be made.

assuming a market is currently at the equilibrium price and quantity what happens when a price ceiling is set above the equilibrium price?

there is nothing preventing the price from reaching its equilibrium level. (when a price ceiling is set above the equilibrium price, there is nothing preventing the price from reaching the equilibrium and staying there)

true or false: some consumers are willing to pay more for a product than they actually pay. this difference between the amount they are willing to pay and what they actually pay is known as consumer surplus

true

true or false: when the economy produces at an ineffective quantity due to a price ceiling or price floor there will be a deadweight loss

true

a surplus of labor

unemployment

excise tax

when the government imposes a per unit tax on output

shortage occurs when( price ceiling)

when the market price is not allowed to rise to the equilibrium level, quantity demanded exceeds quantity supplied, & a shortage occurs. - those who manage to purchase the product at the lower price given by the price ceiling will benefit, but sellers of the product will suffer, along with those who are not able to purchase the product at all. - quality is also likely to deteriorate.

"deadweight loss"

when the mutually profitable gains from trade are not fully exploited there is a lost consumer and producer surplus