Key Terms
Price ceiling
Legal MAXIMUM price. Binding when set BELOW equilibrium.
Original equilibrium
$500 (Qs = Qd = 15,000). Demand increases; new equilibrium would be $600 (Qs = Qd = 17,000).
Price floor
Legal MINIMUM price. Binding when set ABOVE equilibrium.
Law of diminishing marginal utility
The more of something you have; the less you value one more unit.
Allocative efficiency
When all gains from trade are realized; social surplus is maximized; goods go to those who value them most.
Consumer surplus
Willingness to pay minus actual price paid. Area under demand curve; above equilibrium price.
Producer surplus
Actual price received minus minimum acceptable price (cost). Area above supply curve; below equilibrium price.
EXAMPLE (from source)
Equilibrium price = $10. Equilibrium quantity = 3 units.
Deadweight loss
Loss in social surplus from operating at inefficient quantity. The value nobody gets.
Price ceilings
Consumers tend to favor them because they transfer surplus FROM producers TO consumers (at least for those who can still
Price floors
Producers tend to favor them because they transfer surplus FROM consumers TO producers.
Price control
Government law regulating prices instead of letting market forces determine them.
Binding price ceiling
A ceiling set below equilibrium; results in shortage.
Binding price floor
A floor set above equilibrium; results in surplus.
Marginal analysis
Comparing benefits and costs of a little more or a little less of a good.