Price floors and surplus

Andrew Hingston
15 Feb 201005:34
EducationalLearning
32 Likes 10 Comments

TLDRThe script discusses the impact of a price floor on a market, using a graphical example with a demand and supply curve. It explains how a price floor set at $7 creates excess supply, leading to a surplus of goods and a reduction in consumer surplus. Meanwhile, producer surplus increases, but the overall society experiences a loss due to the deadweight loss, illustrating the inefficiencies introduced by government intervention in market mechanisms.

Takeaways
  • 📉 A price floor is a government-imposed minimum price that prevents the market price from falling below a certain level.
  • 📈 The natural market mechanism tends to gravitate towards an equilibrium point, but a price floor disrupts this process.
  • 💲 The example given sets the equilibrium price at $5 with a quantity of 10, but a price floor of $7 is introduced.
  • 🛒 The price floor creates a situation where the quantity demanded (5 units) does not match the quantity supplied (14 units), leading to excess supply or surplus.
  • 🛍️ Consumer surplus shrinks under a price floor, as consumers pay more than the equilibrium price but receive less value.
  • 📦 Producer surplus initially seems to increase due to the higher price, but this is not a net gain for society.
  • 📏 The calculation of consumer surplus involves drawing a horizontal line from the market operation point to the vertical axis and measuring the area between the demand curve and this line.
  • 📐 Similarly, producer surplus is calculated by identifying the market operation point, drawing a horizontal line to the supply curve, and measuring the area between.
  • 🔢 The script explains that the increase in producer surplus does not compensate for the decrease in consumer surplus, indicating a net loss for society.
  • 💔 The area that is not captured by either consumers or producers due to the price floor is known as deadweight loss, representing a welfare loss to society.
  • ⚖️ The overall impact of a price floor is that while it may benefit producers, it harms consumers and results in a decrease in overall social welfare.
Q & A

  • What is the purpose of a price floor?

    -A price floor is set to prevent the price from dropping below a certain level, ensuring that prices remain above the equilibrium point.

  • Where is the price floor set in the example provided?

    -The price floor is set at $7.50, halfway between the market equilibrium price of $5 and the intersecting price of $10.

  • What happens to the market equilibrium when a price floor is introduced?

    -The market equilibrium is disrupted, preventing the price from dropping to its natural equilibrium level. Instead, the market operates at the price floor level.

  • What are the quantities demanded and supplied at the price floor of $7.50?

    -At the price floor of $7.50, the quantity demanded is 5 units, and the quantity supplied is 14 units.

  • What is the result of the discrepancy between quantity demanded and quantity supplied?

    -The result is excess supply or surplus, where there are more goods supplied than demanded, leading to unsold products.

  • How does the price floor affect consumer surplus?

    -Consumer surplus decreases significantly, as the new consumer surplus is the area between the demand curve and the horizontal line at the price floor, which is much smaller than the original consumer surplus.

  • How does the price floor affect producer surplus?

    -Producer surplus increases, as producers gain an additional rectangular area above the original producer surplus triangle. However, the overall benefit to producers does not outweigh the loss in consumer surplus.

  • What is deadweight loss, and how is it represented in this scenario?

    -Deadweight loss is the area of lost economic efficiency that occurs when the equilibrium outcome is not achievable. It is represented by the area that used to be part of consumer and producer surplus but is now lost due to the price floor.

  • What is the overall impact of the price floor on society?

    -The overall impact of the price floor is negative for society, as the decrease in consumer surplus is greater than the increase in producer surplus, leading to a net loss in total surplus and a deadweight loss.

  • How can one calculate the areas of consumer surplus, producer surplus, and deadweight loss?

    -To calculate these areas, one can use geometric formulas: consumer surplus and producer surplus can be calculated using the area of triangles (1/2 base times height) and rectangles (base times height), and deadweight loss is the area of the triangle representing the lost surplus.

Outlines
00:00
📉 Impact of a Price Floor on Market Equilibrium

This paragraph discusses the effects of a price floor in a market scenario. It begins by describing a typical market with a downward sloping demand curve and an upward sloping supply curve, intersecting at an equilibrium point of $5 for a quantity of 10. The government then introduces a price floor at $7, which is above the equilibrium price. This intervention prevents the price from falling below $7, leading to a situation where the quantity demanded (5 units) does not match the quantity supplied (14 units), resulting in excess supply or surplus. The paragraph explains the concept of consumer and producer surplus, showing how the introduction of a price floor reduces consumer surplus and potentially increases producer surplus, although the exact calculation is not provided. It also introduces the concept of deadweight loss, indicating that the market is not operating at its most efficient point and that there is a loss of potential benefit to society as a whole.

05:01
📈 Deadweight Loss and the Redistribution of Surplus

The second paragraph delves into the consequences of the price floor on consumer and producer surplus, and the emergence of deadweight loss. It explains that while producer surplus may increase due to the price floor, consumer surplus decreases by a greater amount, leading to a net loss for society. The paragraph emphasizes the concept of deadweight loss, which is the triangular area representing the potential benefits that are no longer distributed between consumers and producers. This loss represents inefficiency in the market and is a key point in understanding the broader economic implications of price floor policies.

Mindmap
Keywords
💡Price Floor
A price floor is a government-imposed minimum price that a commodity, product, or service can be sold for. It is a form of price control that prevents the price from falling below a certain level. In the video, the price floor is introduced at $7, which is above the market equilibrium price of $5, preventing the market from naturally adjusting to this point and leading to a surplus.
💡Demand Curve
The demand curve represents the relationship between the quantity of a good that consumers are willing to buy and its price. It typically slopes downward, indicating that as the price of a good increases, the quantity demanded decreases, ceteris paribus. In the script, the demand curve is mentioned as downward sloping, intersecting the supply curve at the equilibrium price.
💡Supply Curve
The supply curve illustrates the quantity of a good that producers are willing to offer for sale at various prices. It is usually upward sloping, reflecting that higher prices encourage producers to supply more of the good. The script refers to an 'upward sloping supply curve,' which intersects with the demand curve at the market equilibrium.
💡Market Equilibrium
Market equilibrium occurs where the supply and demand curves intersect, indicating the price and quantity at which the market clears, with the quantity supplied equaling the quantity demanded. The script describes the market equilibrium as being at a price of $5 and a quantity of 10, before the introduction of the price floor.
💡Price Ceiling
A price ceiling is a maximum price set by the government, which is not directly mentioned in the script but is related to the concept of a price floor. While a price floor prevents prices from falling below a certain level, a price ceiling prevents them from rising above it. The script discusses the effects of a price floor, which is the opposite of a price ceiling.
💡Surplus
Surplus, or excess supply, occurs when the quantity supplied exceeds the quantity demanded at a given price. In the context of the video, the surplus is the result of the price floor preventing the market from reaching equilibrium, leading to a situation where suppliers are willing to sell more units than consumers are willing to buy at the price of $7.
💡Consumer Surplus
Consumer surplus is the difference between what consumers are willing to pay for a good and what they actually pay. It represents the perceived benefit or 'savings' to consumers. The script explains that the consumer surplus is reduced due to the price floor, as consumers are now paying more than the equilibrium price for the good.
💡Producer Surplus
Producer surplus is the difference between the price at which producers are willing to sell a good and the actual price they receive. It indicates the extra profit or benefit to producers. The video script discusses how the introduction of a price floor can increase producer surplus, as they are able to sell at a higher price than the equilibrium would allow.
💡Deadweight Loss
Deadweight loss is the inefficiency resulting from a market distortion, such as a price floor or ceiling, that leads to a loss of potential consumer and producer surplus. The script mentions deadweight loss as the area that 'evaporated' due to the price floor, indicating a reduction in overall societal welfare because the surplus is not distributed to either consumers or producers.
💡Equilibrium Quantity
Equilibrium quantity is the amount of a good or service that is bought and sold at the equilibrium price. It is the point where the quantity demanded equals the quantity supplied. The script uses the equilibrium quantity of 10 as an example to illustrate the effects of a price floor on the market.
💡Government Intervention
Government intervention in the script refers to the act of setting a price floor, which is a form of market regulation. The video discusses how this intervention can alter the natural forces of supply and demand, leading to unintended consequences such as surplus and deadweight loss.
Highlights

Introduction of a price floor in a market with a downward sloping demand curve and an upward sloping supply curve.

Assumption of market equilibrium at $10 and $1 intersecting at $5 with a quantity of 10.

Government intervention by setting a price floor at $7 to prevent prices from falling below this level.

Market operation under the price floor, leading to either a quantity demanded of 5 or supplied of 14 at $7.

Concept of excess supply or surplus due to the price floor, resulting in unsold goods.

Explanation of consumer surplus and its calculation under market equilibrium.

Impact of the price floor on consumer surplus, showing a significant reduction.

Producer surplus calculation and its comparison with consumer surplus under the price floor.

Increase in producer surplus despite the price floor, contrasting with the decrease in consumer surplus.

Introduction of deadweight loss as a consequence of the price floor, indicating societal inefficiency.

Calculation of deadweight loss through the comparison of triangles and rectangles formed by the price floor.

Overall societal impact of the price floor, with consumers worse off and a net loss in surplus.

Potential benefits to producers from the price floor, despite the overall negative societal effect.

Graphical representation of the market before and after the introduction of the price floor.

Discussion on the redistribution of surplus from consumers to producers due to the price floor.

Economic implications of the price floor, highlighting the shift in surplus and the creation of deadweight loss.

Final thoughts on the price floor's effect on market dynamics and societal welfare.

Transcripts

Browse More Related Video

How to Calculate Deadweight Loss (with a Price Floor) | Think Econ

Consumers 'surplus Producers' Surplus , Total surplus, deadweight loss with price floor

Consumer/Producer Surplus & Deadweight Loss

Consumer Surplus, Producer Surplus,& Deadweight Loss before and after imposing the price ceiling?

Rent control and deadweight loss | Microeconomics | Khan Academy

Price Ceiling: Consumer Surplus, Producer Surplus, & Deadweight loss

Rate This

5.0 / 5 (0 votes)

Thanks for rating:

Related Tags
Price FloorMarket EquilibriumConsumer SurplusProducer SurplusEconomic PolicySupply and DemandEconomic TheoryDeadweight LossGovernment InterventionEconomic Impact