• Meaning: A small change in price leads to a large change in quantity demanded (∣Ed​∣>1).

• Revenue: A price cut increases total revenue.

Producer's surplus: Difference between the producer's minimum accepted price and the price they would receive.

• Meaning: A large change in price leads to only a small change in quantity demanded (∣Ed​∣<1).

• Revenue: A price increase increases total revenue.

• Examples: Necessities like gasoline or essential medicine.

- CS = WTP - P

- Measuring consumer surplus with the demand curve: a low price raises consumer surplus.

The converse situation can apply when consumers are willing to pay a higher price than producers would accept.

PRODUCER SURPLUS: Difference between the price a producer is willing to accept and what is actually paid (area between demand curve and market equilibrium).

binding Price floor: CS=E; PS=C+D; --> DWL=A+B

AFC= FC/Q

AVC= VC/Q

ATC= TC/Q

ATC= AVC + AFC

AFC - always declines as output rises

AVC - typically rises as output increases

MC < ATC => ATC falling

MC > ATC => ATC rising

• At this higher price, supply > demand → surplus.

Graph:

• Again, draw supply & demand curves.

• Show equilibrium.

• Draw a horizontal line above equilibrium → label it "Price Floor".

• Shade the gap between Qs and Qd → surplus.

Example:

• Minimum wage: Government sets a wage higher than market equilibrium.

• Result: More workers want jobs, but firms hire fewer → unemployment (surplus of labor).

• Agricultural price supports: Government guarantees farmers a minimum price for crops → leads to surpluses.

• Income (normal vs interior)

  • Normal good: income increases --> D increase (shift right)

  • Interior: income increases --> D decrease (shift left)

• Prices of related goods (substitutes vs complements)

  • Substitutes: increase Price of 1 --> D for other increase (shift right)

• Tastes

• Expectations

• Number of buyers: increase --> D increase (shift right)

Supply:

• Input Prices: increase --> S decrease (shift left)

• Technology: advance --> S increase (shift right)

• Expectations about the future

• Number of sellers: increase --> S increase (shift right)

• Types of costs: Fixed Cost (FC), Variable Cost (VC), Total Cost (TC), Marginal Cost (MC).

• Draw and interpret cost curves (AFC, AVC, ATC, MC).

• Practice identifying costs in short case readings. For example:

     " Ms. Trang owns a small café in a busy neighborhood. Every month, she pays $2,000 rent and $1,000 in salaries (fixed costs). To make each cup of coffee, she needs beans, milk, sugar, and a cup, costing $1.50, plus $0.50 in electricity and water (variable costs). At 2,000 cups sold, calculate her fixed, variable, and marginal costs."

Tax: CS=A, PS=B, TR=orange ==> TS=CS+PS+TR; DWL

Demand increase (shift right) — price rises and quantity rises (P ↑, Q ↑)

• Meaning: A small change in Price leads to a large change in Quantity Supplied (Es​>1).

• Timing: Supply tends to be more elastic in the long run.

• Meaning: A large change in Price leads to only a small change in Quantity Supplied (Es​<1).

• Examples: In the short run, specialized goods, or agricultural products after the harvest.

• A maximum price set by the government.

• Result: Shortage – too many buyers, not enough sellers.

📈 Price Floor

• A minimum price set by the government.

• Result: Surplus – too many sellers, not enough buyers.

1. Fixed Cost (FC)

• Definition: Costs that do not change with the level of output.

• Examples: rent, permanent staff salaries, insurance.

• Recognition: Even if production = 0, you still pay this cost.

2. Variable Cost (VC)

• Definition: Costs that change depending on output.

• Examples: raw materials, packaging, electricity, water.

• Recognition: The more you produce, the higher this cost.

3. Total Cost (TC)

• Formula: TC = FC + VC

• Definition: The total cost of producing a certain quantity of goods or services.

4. Marginal Cost (MC)

• Definition: The extra cost of producing one additional unit.

• Formula: MC = ΔTC / ΔQ

• Recognition: Ask yourself, “How much more will it cost to produce one more unit?”

Purpose: protect consumers, keep essential goods/services affordable.

Outcome: price below equilibrium → shortage (excess demand).

Examples: rent control, basic necessities.

Impacts:

• Consumers benefit if they obtain goods at lower price.

• Producers lose revenue, reduce supply.

• Market faces shortages, rationing, possible black markets.

Political economy: driven by consumer demand and voter pressure, especially in housing and essential goods.

• Fixed Cost (FC) = $2,000 rent + $1,000 salaries = $3,000

• Variable Cost (VC) = $2 per cup × 2,000 cups = $4,000

• Total Cost (TC) = FC + VC = $3,000 + $4,000 = $7,000

• Marginal Cost (MC) = $2 (the cost of making one more cup)

Tax burden on buyers = Pb-Pe

Pb > Pe; Ps < Pe

Definition: A legal maximum price sellers are allowed to charge.

🔹 Binding condition: below the equilibrium price.

At this lower price, demand > supply → shortage.

Graph:

• Draw supply & demand curves.

• Show equilibrium.

• Draw a horizontal line below equilibrium → label it “Price Ceiling”.

• Shade the gap between Qd and Qs → shortage.

Examples:

• Rent control: Government sets maximum rent lower than market rent.
  → More people want apartments, but landlords supply fewer → housing shortage.

• Gasoline price controls (1970s US): Ceiling on gas prices led to long lines and shortages at gas stations.