Price Ceiling

Changes:
- CS: AEPe → ABDPc
- PS: PeEF → PcDF
- TSS: AEF → ABDF
- DWL: 0 → BED

Results:
- MB > MC
⇨ Underproduction
⇨ DWL exists
- P, Q, TR, TE, PS, TSS ↓

1. Consumer surplus
Steps:
1) Find MB, P, Q (*new)
2) UPPER area trapped and
touched x-axis is the CS

Econ Ch.16 Explanations Page 1

2. Producer surplus
Steps:
1) Find MC. P, Q (*new)
2) Lower area trapped and
touched x-axis is the CS

3. Total social surplus

Steps:
1) Find CS and PS
2) CS + PS = TSS

Econ Ch.16 Explanations Page 2

4. Deadweight loss
Steps:
1) Find the change in quantity
(between Qc and Qe)
OR
1) Find old and new TSS
2) Old – New = DWL

5. Marginal benefit and marginal cost (MB & MC)

- MB > MC ⇨ underproduction
- MC > MB ⇨ overproduction

MB:
Starting from the end of the D = MB (the red point), move along the demand curve until you reach the
intersection point except equilibrium point (point B).* The corresponding price of point B is Px.
∴ MB = Px

MC:
Starting from the end of S = MC (the red point), move along the supply curve until you reach the intersection
point except equilibrium point (point D).* The corresponding price of point D is Pc.
∴ MC = Pc

Referring to the diagram:

∵ Px > Pc ⇨ MB > MC
∴ underproduction

* On the demand / supply curve, there are two points, B & E / D & E. Since E is the equilibrium point, the
intersection point should be B / D.

Econ Ch.16 Explanations Page 3

Price Floor
Changes:
- CS: AEPe → ABPf
- PS: PeEF → PfBDF
- TSS: AEF → ABDF
- DWL: 0 → BED

Results:
- MB > MC
⇨ Underproduction
⇨ DWL exists
- P↑
- Q, CS, TSS ↓

Quota
Changes:
- CS: AEPe → ABPq
- PS: PeEF → PqBDF
- TSS: AEF → ABDF
- DWL: 0 → BED

Results:
- MB > MC
⇨ Underproduction
⇨ DWL exists
- P↑
- Q, CS, TSS ↓

The methods of finding CS, PS, TSS, DWL, MB, MC are the same :)

Econ Ch.16 Explanations Page 4

Unit tax
Changes:
- CS: AEPe → ABPt
- PS: PeEF → PxDF
- TSS: AEF → ABDF
- G’s TR: 0 → PtBDPx
- DWL: 0 → BED

Results:
- MB > MC
⇨ Underproduction
⇨ DWL exists
- P↑
- Q, TR, CS, PS, TSS ↓

1. Consumer surplus
Steps:
1) Find MB, P, Q (*new)
2) UPPER area trapped and
touched x-axis is the CS

Econ Ch.16 Explanations Page 5

2. Producer surplus
Steps:
1) Find MC (*OLD),
LP (*$ that producer receive),
Q (*new)
2) LOWER area trapped and
L touched x-axis is the PS

* The cost of producing a good

remains unchanged. Therefore,
MC is measured by the original
supply curve (S)
* $ that producer receive = Px

3. Government’s tax revenue

Steps:
1) Find the price that consumers pay (Pt)
2) Find the price that producers receive (Px)
3) Pt – Px = $ that government receives
4) $ that government receives ✕ Q (*new)
= government’s tax revenue

Econ Ch.16 Explanations Page 6

4. Total social surplus
Steps:
1) Find CS and PS
2) Find the government’s tax revenue
3) TSS = CS + PS + G’s TR

5. Deadweight loss
Steps:
1) Find the change in quantity
(between Qt and Qe)
OR
1) Find old and new TSS
2) Old – New = DWL

Econ Ch.16 Explanations Page 7

6. Marginal benefit and marginal cost
- MB > MC ⇨ underproduction
- MC > MB ⇨ overproduction

MB:
Starting from the end of the D = MB (the red point), move along the demand curve until you reach the
intersection point except equilibrium point (point B).* The corresponding price of point B is Pt.
∴ MB = Pt

MC:
Starting from the end of S = MC (the red point), move along the supply curve until you reach the intersection
point except equilibrium point (point D).* The corresponding price of point D is Px.
∴ MC = Px

Referring to the diagram:

∵ Pt > Px ⇨ MB > MC
∴ underproduction

* On the demand / supply curve, there are two points, B & E / D & E. Since E is the equilibrium point, the
intersection point should be B / D.
* The cost of producing a good remains unchanged. Therefore, MC is measured by the original supply curve
(S).

Econ Ch.16 Explanations Page 8

Unit subsidy ***
Changes:
- CS: AEPe → ADPs
- PS: PeEC → PsDF
- TSS: AEC → AEC – BED
- G’s TR: 0 → BDFC
- DWL: 0 → BED

Results:
- MB < MC
⇨ Overproduction
⇨ DWL exists
- P, TSS ↓
- Q, TR, CS, PS ↑

1. Consumer surplus
Steps:
1) Find MB, P, Q (*new)
2) UPPER area trapped and
touched x-axis is the CS

Econ Ch.16 Explanations Page 9

2. Producer surplus
Steps:
1) Find MC (*OLD),
LP (*$ that producer receive),
Q (*new)
2) LOWER area trapped and
L touched x-axis is the PS

* The cost of producing a good

remains unchanged. Therefore,
MC is measured by the original
supply curve (S)
* $ that producer receive = Px

3) After finding the new PS, we

L can shift the PS download
L for easy observation

* Their areas are the same (~ △)

After shifting the PS:

Econ Ch.16 Explanations Page 10

3. Government’s subsidy
Steps:
1) Find the price that consumers pay (Ps)
2) Find the price that producers receive (Px)
3) Pt – Px = $ of government’s subsidy
4) $ of government’s subsidy ✕ Q (*new)
= government’s subsidy
5) After finding the G’s S, we can shift the
L G’s S downward for easy observation

After shifting the G’s S:

Econ Ch.16 Explanations Page 11

4. Total social surplus
Steps:
1) Find CS and PS
2) Find the government’s S
3) TSS = CS + PS – G’s S
= ADPs + PxBC – PxBDPs
= ADPs + PsDF – BDFC
= ADF – BDFC
= AEC – EBD

5. Deadweight loss
Steps:
1) Find the change in quantity
(between Qs and Qe)
OR
1) Find old and new TSS
2) DWL = Old – New
L = AEC – (AEC – EDB)
L = EDB

Econ Ch.16 Explanations Page 12

6. Marginal benefit and marginal cost
- MB > MC ⇨ underproduction
- MC > MB ⇨ overproduction

MB:
Starting from the end of the D = MB (the red point), move along the demand curve until you reach the
intersection point except equilibrium point (point D).* The corresponding price of point B is Ps.
∴ MB = Ps

MC:
Starting from the end of S = MC (the red point), move along the supply curve until you reach the intersection
point except equilibrium point (point B).* The corresponding price of point D is Px.
∴ MC = Px

Referring to the diagram:

∵ Px > Ps ⇨ MC > MB
∴ overproduction

* On the demand / supply curve, there are two points, D & E / B & E. Since E is the equilibrium point, the
intersection point should be D / B.
* The cost of producing a good remains unchanged. Therefore, MC is measured by the original supply curve
(S).

Econ Ch.16 Explanations Page 13