5. Consumer and Producer Surplus; Price Ceilings and Floors
Price Ceilings, Price Floors, and Black Markets
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All right, let's try this example. Consider the following graph. A price floor of $20 would cause a surplus of 500, a shortage of 500, a surplus of 1,000 units, a shortage of 1,000 units or no effect. Alright, so the first thing we want to check when we get a price floor or price ceiling problem is whether or not the price floor or price ceiling is gonna be effective, right? And I use my trick of that little house to figure out if it's effective or not, right? Cause you're on the test and you're like man, is price floor, price ceiling? Which one's below equilibrium? Which one's above equilibrium? Well just remember that the ceiling is the one that makes the house with the ceiling price that's effective, right? We've got the house right here and this ceiling of the house is our ceiling price that makes an effective price ceiling, right? So boom, right there I remembered on the test that effective price ceilings are below equilibrium, right? That's what we see in this problem, an equilibrium of 25 and an effective price ceiling below equilibrium. So now that I've figured out ceilings, I can I know that floors are the opposite, right? And in this question we're talking about price floors, right? So now that I know that an effective price ceiling is below equilibrium from my house trick, I know that an effective price floor is above equilibrium, right? Above and I just figured this out just from the little house trick. So now I can go back to my graph. I'm gonna erase all this, right? Well, I can leave the P star and so all of that was just to think was it effective or ineffective? Boom. We know that an effective price floor would be above equilibrium and what do we have here? A price floor of 20 which is below equilibrium, right? So this is an ineffective price floor and just like that we know that the answer is gonna be no effect, right? At this price floor, the government set a minimum of $20 that could be charged, but it doesn't matter to the market because they were trading at 25 which is above the minimum, right? And that's okay, that's within the law and they're just gonna keep doing what they were doing and trading at 25. So the answer here is no effect. Let's go ahead and move on to the next video.
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