Using supply and Demand to Analyse market34sdxzs

Both consumers and suppliers benefit from the market.

If previously we analysed supply and demand, this chapter analyses what are the benefits (who loses
and wins for the market)

Consumer surplus = the difference between the price the consumers are willing to pay for a good and
the price they actually have to pay.
Ex: a guy in a desert would pay $1000 for water while the market price is $1. The surplus is the
difference between how much he would pay and how much it costs.
When someone wants something really bad => INELASTIC demand

If a person is willing to pay

less than the market price = she
won’t get anything

Total consumer surplus = Orange area

Here we have a list of customers, each willing to pay an amount for the good.

Producer surplus = the difference between the prices producers get for the good and the prices that they
are willing to sell them at.
Steps
1. Determine price
of equilibrium and quantity of equilibrium
2. Plot the graph – remember to calculate demand choke price and supply choke price
3. Graficele se fac luand doua puncta si trasand linia
4. Put on the graph the equilibrium price - this is the minimum market price
5. Make sure the curves connect in the equilibrium point
6. Calculate area triunghiurilor

Total surplus = sum of consumer and producer surplus

CONSUMER AND PRODUCER SURPLUS The concepts of producer and consumer surplus can be
used to analyze the impact of any change on either side of the market.
 Shifts in the demand or supply curve

Instead of showing the impact change in supply and demand have on price and quantity, we now look
for the surplus to determine the impact it has on consumers and producers.
Price regulations = ceilings

 Politicians often call for price regulations on products whose prices have risen sharply

Price ceiling: the highest price that can be paid legally for a good or service

- Binding only when set below the equilibrium price

- Nonbinding price ceiling: a price ceiling set above the equilibrium market price What are the
effects of price ceilings on markets?
- It might lead to excess demand - the price gets very low compared to what producers can make
and there is huge demand.

Transfer: surplus that moves from producers to consumers, or vice versa, as a result of a regulation
Deadweight loss (DWL): the reduction in total surplus that occurs as a result of a market inefficiency

1. Example: Tickets for the UEFA Champions League final

2. Example: Rent cap

 In January 2020, the Berlin local government introduced a rent cap from €3.92 to €12.65 a
month per square meter depending on the age, location, and amenities of a building

Goal according to the housing minister:

 “We don’t want Berlin to be a metropolis like London or Paris where normal earners cannot
afford a home anymore”
 “The cap will create a certain equality between landlords and tenants.”

How does a binding price ceiling affect the market?

Unregulated price is 15$/m2, price ceiling is 10$/m2
 Decompose total effect into effects on consumers and producers…

The supply and demand elasticities determine the relative sizes of the deadweight loss and the transfer.
If demand and supply are relatively elastic, the deadweight loss is larger and the transfer from
producer surplus to consumer surplus is smaller.
 The more sensitive consumers and producers are to prices, the greater the change in quantity
demanded and supplied.
Alternatively, if demand and supply are relatively inelastic, the deadweight loss is a smaller and the
transfer from producer surplus to consumer surplus is larger.
The other type of price regulation is a price floor.
Price floor: a regulation that sets the minimum price that can be legally paid for a good or service
(often called a price support)
 Binding only when set above the equilibrium price
 Nonbinding price floor: a price floor set below the equilibrium market price

1. Example: Minimum wage

2. Example:
 • In 2018, the Scottish government introduced a minimum alcohol price of 50 pence per
unit (= 6.25 pence per gram) of alcohol
• The aim was to reduce alcohol consumption and increase health gains among the heaviest
drinkers

How does a binding price floor affect the market?

Taxes
Taxes are very
prevalent in
societies.
Examples:
1. Product markets (e.g., VAT, excise taxes)
2. Labor markets (e.g., income taxes, payroll taxes)
3. Capital markets (e.g., capital gains taxes)