👨‍🏫 Notes on Lecture 9

Pindyck and Rubinfeld: Section 4.4
 Sections 9.1 – 9.4
 Section 11.1

CS, PS, GS, SS…

Consumer Surplus (CS) is all area:

1. Under the demand curve
2. Above the Price consumer pay
3. To the left of the maximum number of units consumers actually consume.

Here is an illustration:

Producer Surplus (PS) is all area:

1. Above the Supply Curve
2. Below the price producers receive
3. To the left of the number of units actually produced.

Here is an illustration:

Government Surplus (GS) is either

$\text{price} \times \text{surplus} (Q_S - Q_D)$  [Price Floor - gov’t buys surplus]
or
$\text{tax} \times Q_{\text{tax}}$  [Tax]

Social Surplus = Total Surplus

$SS = CS + PS + GS$

Practice problems

✏ Fill in the following table for a binding price ceiling. Also identify the quantity demanded, quantity supplied, and the shortage or surplus, if any. What is the deadweight loss of the price floor?

	Before Price Ceiling	After Price Ceiling	Change
CS
PS
SS

✔ Click here to view answer

Solution is at the bottom of the page.  ✅

✏️ Fill in the following table for a binding price floor. The government does not buy the surplus. Also identify the quantity demanded, quantity supplied, and the amount of surplus produced, if any. What is the deadweight loss of the price floor?

	Before Price Floor	After Price Floor	Change
CS
PS
SS

✔ Click here to view answer

Solution is at the bottom of the page.  ✅

✏️ Fill in the following table for a binding price floor. The government buys the surplus. Also identify the quantity demanded, quantity supplied, and the amount of surplus produced, if any. What is the deadweight loss of the price floor?

	Before Price Floor	After Price Floor	Change
CS
PS
Gov
SS

✔ Click here to view answer

Solution is at the bottom of the page.  ✅

✏️ Fill in the following table describing the social welfare effects of Monopoly vs Perfect Competition. Also identify amount supplied by the monopoly and under perfect competition. What is the deadweight loss of the monopoly?

	Perfect Competition	Monopoly	Change
CS
PS
SS

✔ Click here to view answer

Solution is at the bottom of the page.  ✅

✏️ Fill in the following table describing the social welfare effects of a tax. What is the deadweight loss of the tax?

	Before Tax	After Tax	Change
CS
PS
Gov
SS

✔ Click here to view answer

Solution is at the bottom of the page.  ✅

Solutions to the Exercises

Binding vs. Non-binding Price Controls:

	Binding	Non-binding
Price Floor	Binding Price Floor Price Floor > $P^*$ ⇨ Surplus	Non-binding Price Floor Price Floor < $P^*$ ⇨ NO EFFECT
Price Ceiling	Binding Price Ceiling Price Ceiling < $P^*$ ⇨ Shortage	Non-binding Price Ceiling Price Ceiling > $P^*$ ⇨ NO EFFECT