How price controls reallocate surplus | APⓇ Microeconomics | Khan Academy | Summary and Q&A

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October 5, 2017
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How price controls reallocate surplus | APⓇ Microeconomics | Khan Academy

TL;DR

Price controls, such as price ceilings and price floors, can lead to changes in surplus allocation between consumers and producers, resulting in shortages or surpluses.

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Questions & Answers

Q: What happens when a price ceiling is implemented?

When a price ceiling is put in place, a shortage occurs as the quantity demanded exceeds the quantity supplied. This can lead to difficulties for consumers in finding housing or other goods/services affected by the ceiling.

Q: How do price controls impact consumer and producer surpluses?

Price controls can shrink the total surplus, which is the summation of consumer surplus and producer surplus. In the case of a price ceiling, the producer surplus is significantly reduced, while some consumers may benefit but not all.

Q: Do all producers benefit from a price floor?

No, not all producers benefit from a price floor. While some producers may benefit from the higher price that is guaranteed, a surplus is created, leading to farmers who are unable to sell their goods at the minimum price.

Q: What are the potential consequences of implementing price controls?

Implementing price controls can have unintended consequences, such as reduced investment by producers due to lower profits or a decrease in the availability of goods/services due to shortages or surpluses.

Summary & Key Takeaways

  • Price controls, such as price ceilings and price floors, can be implemented by governments to regulate markets and address perceived issues.

  • Price ceilings, which set a maximum price, can lead to a shortage as the quantity demanded exceeds the quantity supplied.

  • Price floors, which set a minimum price, can result in a surplus as the quantity supplied exceeds the quantity demanded.

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