CS and PS with Price Ceilings
Producer Surplus
- A general rule for producer surplus is that it is always below the price producers are receiving but above the supply curve (only until the quantity being sold).
- In the diagram above, the producer surplus with the price ceiling is ________
Consumer Surplus
- A general rule for consumer surplus is that it is always above the price consumers are paying but below the demand curve (only until the quantity being sold).
- The consumer surplus is ________
Deadweight Loss
- Deadweight Loss (DWL) - also called change in total surplus or change in welfare as we go from equilibrium to the new point with the government intervention. It is caused by the loss in consumer and producer surplus due to the lower quantity being produced.
- DWL is always a triangle between the old equilibrium and new equilbrium quantities.
- The DWL is ________
Example: CS, PS, DWL with Price Ceiling
Suppose the demand is P = 250 - 3Q and supply is P = 50 + Q. If there is a price ceiling of $90, what would be the consumer surplus, producer surplus and deadweight loss?
Plug the price of 90 into the supply equation: 90 = 50 + Q
Q = 40
Plug the quantity of 40 in to the demand equation:
P = 250 - 3(40) = 130
Producer surplus = 40 * (90 - 50) * 1/2 = $800
Consumer surplus = (40*40) + (40*120*1/2) = $4000
DWL = (50 - 40) * (130 - 90) * 1/2 = $200