ch.4 Price Controls & Quotas

consumer surplus

diff b/w max market price consumer willing to pay for something - the price they actual pay

assessment: George is considering the purchase of some new shirts for work. He is willing to pay $35 for the first shirt, $25 for the second shirt, and $15 for the third one; Oxford Clothiers, his favorite shirt manufacturer, is selling shirts for $28 each.

1. What is the efficient number of shirts for George to buy?​

2. What is George’s consumer surplus?

35 - 28 = 7

less additional MU from each additional unit of product we purchase

25 - 28 = -3

15 - 28 = -13

buy 2nd price at 50% off

MC = $10

1st shirt = $25 profit margin

2nd shirt = $4 profit margin

producer surplus

diff b/w equil price - minimum price they're willing to accept

most efficient?

Andrew (lowest price yet still profitable)

identify PS & CS

p2:

- CS: ABC

- PS: EFG

- transaction

P3:

- CS: A

- PS: BEG

p1:

- Q1

- CF = deadweight

- PS: G

- CS: ABE

CF = deadweight

Price ceiling:

maximum price sellers are allowed to charge for a good or service (Only effective BELOW equilibrium).​

Price floor:

minimum price buyers are required to pay for a good or service (Only effective ABOVE equilibrium).​

in price ceilings

Prevents prices from performing it’s rationing function in a free market system.​

this is a ____

shortage

Qd > Qs

how are they allocated w/ price ceiling?

• Consumer Surplus:

  • Increases: Consumers pay less, boosting consumer surplus.

  • Shortages: If demand exceeds supply, some consumers can't buy the product, reducing overall surplus.

• Producer Surplus:

  • Decreases: Producers earn less, shrinking producer surplus.

  • Reduced Incentives: Lower prices may discourage production, leading to fewer goods available.

Suppose the accompanying graph represents the supply and demand for taxi rides. If the government imposes a price ceiling of $20, what does X represent?​

shortage

Binding price ceiling or price floor

one that must be adhered to by all people. 

Non-binding price ceiling or price floor

• one that does not change the market. 

a price floor below equilibrium;

non-binding & has no effect

Solve