Module 2 Review - Consumer & Producer surplus, Total surplus, Price ceiling, etc

Consumer Surplus

Below the demand curve, above current price, out to the quantity that consumers purchase (QD).

Producer Surplus

Above the supply curve, below current price, out to the quantity that suppliers supplied (QD).

Formula for calculating surplus

1/2 (quantity demanded) (highest price - lowest price)

Total surplus

consumer surplus + producer surplus

Price Ceiling

A max price set by the government

The price ceiling only has an affect when....

Its set below equilibrium price

Price Floor

A min price set by the government

The price floor only has an affect when....

Its set above equilibrium price

What happens when a price ceiling is set below the equilibrium price?

Shortage, quantity getting bought and sold decreases. All producers worse off and producer surplus decreases. Some consumers are better off and consumer surplus may increase.

What happens when a price floor is set above the equilibrium price?

Surplus, quantity getting bought and sold decreases. All consumers worse off and consumer surplus decreases. Some producers are better off and producer surplus may increase.

What happens to total surplus when both a price floor is set above EQP or when a price ceiling is set below EQP?

Total surplus decreases, creating a deadweight loss

deadweight loss

the fall in total surplus that results from a market distortion, such as a tax