• Suppose the minimum price the owner of the movie theater would have accepted for admission is $5. But she doesn’t sell admission for $5; she sells it for $7. Her producers’ or sellers’ surplus is $2. A seller prefers a large producers’ surplus to a small one. The theater owner would have preferred to sell admission to the movie for $8 instead of $7 because then she would have received $3 producers’ surplus.

• Total surplus is the sum of the consumers’ surplus and producers’ surplus.

• Total surplus = Consumers’ surplus + Producers’ surplus

Consumers’ Surplus (CS)

• The difference between the maximum price a buyer is willing and able to pay for a good or service and the price actually paid.• CS = Maximum buying price –

Price paid

Producers’ (Sellers’) Surplus (PS)

• The difference between the price sellers receive for a good and the minimum or lowest price for which they would have sold the good. • PS = Price received - Minimum selling

price.

Total Surplus (TS)

•The sum of consumers’ surplus and producers’ surplus. •TS = CS + PS.

exhibit 16 (a) Consumers’ surplus

• As the shaded area indicates, the difference between the maximum or highest amount buyers would be willing to pay and the price they actually pay is consumers’ surplus.

exhibit 16 (b) Producers’ surplus

• As the shaded area indicates, the difference between the price sellers receive for the good and the minimum or lowest price they would be willing to sell the good for is producers’ surplus.

EXCESS SUPPLY-EXCESS DEMAND

Exhibit 12

• Surplus (Excess Supply): A condition in which quantity supplied is greater than quantity demanded. Surpluses occur only at prices above equilibrium price.

• Shortage (Excess Demand): A condition in which quantity demanded is greater than quantity supplied. Shortages occur only at prices below equilibrium price.

• Equilibrium Price (Market-Clearing Price): The price at which quantity demanded of the good equals quantity supplied.

• Equilibrium Quantity: The quantity that corresponds to equilibrium price. The quantity at which the amount of the good that buyers are willing and able to buy equals the amount that sellers are willing and able to sell, and both equal the amount actually bought and sold.

Moving to Equilibrium: What Happens to Price whenThere Is a Surplus or a Shortage?

• What did the auctioneer do when the price was $9.00 and there was a surplus of corn? He lowered the price. What did the auctioneer do when the price was $5.25 and there was a shortage of corn? He raised the price. The behavior of the auctioneer can be summarized this way: If a surplus exists, lower the price; if a shortage exists, raise the price. This is how the auctioneer moved the corn market into equilibrium. Not all markets have auctioneers. (When was the last time you saw an auctioneer in the grocery store?) But many markets act as if an auctioneer were calling out higher and lower prices until equilibrium price is reached. In many real-world auctioneer-less markets, prices fall when there is a surplus and rise when there is a shortage. Why?

WHY DOES PRICE FALL WHEN THERE IS A SURPLUS?

• In Exhibit 13, there is a surplus at a price of $15: Quantity supplied (150 units) is greater than quantity demanded (50 units). Suppliers will not be able to sell all they had hoped to sell at $15. As a result, their inventories will grow beyond the level they hold in preparation for demand changes. Sellers will want to reduce their inventories. Some will lower prices to do so, some will cut back on production, others will do a little of both. As shown in the exhibit, there is a tendency for price and output to fall until equilibrium is achieved.

WHY DOES PRICE RISE WHEN THERE IS A SHORTAGE?

In Exhibit 13, there is a shortage at a price of $5: Quantity demanded (150 units) is greater than quantity supplied (50 units). Buyers will not be able to buy all they had hoped to buy at $5. Some buyers will bid up the price to get sellers to sell to them instead of to other buyers. Some sellers, seeing buyers clamor for the goods, will realize that they can raise the price

Exhibit 13: Moving to Equilibrium

• If there is a surplus, sellers’ inventories rise above the level they hold in preparation for demand changes. Sellers will want to reduce their inventories. As a result, price and output fall until equilibrium is achieved. If there is a shortage, some buyers will bid up price to get sellers to sell to them instead of to other buyers. Some sellers will realize they can raise the price of the goods they have for sale. Higher prices will call forth added output. Price and output rise until equilibrium is achieved. (Note: Recall that price, on the vertical axis, is price per unit of the good, and quantity, on the horizontal axis, is for a specific time period. In this text, we do not specify this on the axes themselves, but consider it to be understood.

PRICE CONTROLS• Because scarcity exists, there is a need for a

rationing device—such as dollar price. But price is not always permitted to be a rationing device. Sometimes, price is controlled. There are two types of price controls: price ceilings and price floors. In the discussion of price controls, the word price is used in the generic sense. It refers to the price of an apple, for example, the price of labor (wage), the price of credit (interest rate), and so on.

Price Ceiling• A price ceiling is a government-mandated

maximum price above which legal trades cannot be made. For example, suppose the government mandates that the maximum price at which good X can be bought and sold is $8. It follows that $8 is a price ceiling. If $8 is below the equilibrium price of good X, as in Exhibit 19, any or all of the following effects may arise.

Exhibit 19: A Price Ceiling

• The price ceiling is $8 and the equilibrium price is $12. At $12, quantity demanded = quantity supplied. At $8 quantity demanded > quantity supplied. (Recall that price, on the vertical axis, always represents price per unit. Quantity, on the horizontal axis, always holds for a specific time period.)

SHORTAGES• At the $12 equilibrium price in Exhibit 19, the

quantity demanded of good X (150) is equal to the quantity supplied (150). At the $8 price ceiling, a shortage exists. The quantity demanded (190) is greater than the quantity supplied (100). When a shortage exists, there is a tendency for price and output to rise to equilibrium. But when a price ceiling exists, this tendency cannot be realized because it is unlawful to trade at the equilibrium price.

FEWER EXCHANGES

• At the equilibrium price of $12 in Exhibit 19, 150 units of good X are bought and sold. At the price ceiling of $8, 100 units of good X are bought and sold. (Buyers would prefer to buy 190 units, but only 100 are supplied.) We conclude that price ceilings cause fewer exchanges to be made. Notice in Exhibit 19 that the demand curve is above the supply curve for all quantities less than 150 units. (At 150 units, the demand curve and the supply curve intersect and thus share the same point in the two-dimensional space.)

• This means the maximum buying price is greater than the minimum selling price for all units less than 150. In particular, the maximum buying price is greater than the minimum selling price for units 101 to 149. For example, buyers might be willing to pay $17 for the 110th unit, and sellers might be willing to sell the 110th unit for $10. But no unit after the 100th unit (not the 110th unit, not the 114th unit, not the 130th unit) will be produced and sold because of the price ceiling. In short, the price ceiling prevents mutually advantageous trades from being realized.

Exhibit 20: The price floor is $20 and the equilibrium price is $15. At $15, quantity demanded = quantity supplied. At $20, quantity supplied > quantity

demanded.

• 1) In a market where Qdx= 50-0.5P and Qsx=20+P, government mandates TL 15 as a price ceiling. Find the excess supply.

• 2) Qdx= 100-P. Calculate the consumer surplus when the price of X is 75.

• 3) In a market where Qdx= 50-0.5P and Qsx=20+P find the price level at which government’s price ceiling policy can’t be successfull.

• 4) Qdx= 50-0.5P. If the price of X falls to TL 8 from TL 10, calculate the change in consumer surplus.

• 5) Qdx=10-2P. If the price of X falls to TL 2 from TL 3, calculate the the change in consumer surplus.