AP Micro / Consumer & Producer Surplus, Market Controls

What is Consumer Surplus (CS)?

The area between the demand curve and the price level, representing the difference between what consumers are willing to pay for a good and the price they actually pay.

What is Producer Surplus (PS)?

The area between the supply curve and the price level, representing the difference between what producers are willing to accept for a good and the price they actually receive.

What is Total Surplus?

The sum of Consumer Surplus and Producer Surplus, reflecting the overall economic benefit from trade.

What is Deadweight Loss (DWL)?

The loss of economic efficiency when the equilibrium outcome is not achievable or not achieved due to market distortions.

What is a price floor and who does it protect?

A minimum price that must be paid for a good or service; protects producers.

What is a price ceiling and who does it protect?

A maximum price that can be charged for a good or service; protects consumers.

A binding price floor goes ______ the equilibrium and results in a ______.

above, surplus

A binding price ceiling goes ______ the equilibrium and results in a ______.

below, shortage

What will happen to consumer & producer surplus when the price ceiling is set above the equilibrium price, or when the price floor is set below the equilibrium price? (This is called a non-binding price ceiling or price floor)

They’ll remain the same.

What is a subsidy?

Financial assistance provided by the government to encourage the production or consumption of a good or service, effectively LOWERING its PRICE for consumers and INCREASING SUPPLY, leading to increased consumer surplus and producer surplus.

What’s the producer surplus if a price floor was placed at $12?

BCGHJ

What’s the deadweight loss if a price floor was placed at $12?

DI

Demand coefficient of elasticity from $12 to $10, and whether it’s elastic, unit elastic, or inelastic.

-6, elastic

Supply coefficient of elasticity (before tax) from $10 to $12

2.5, elastic