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[link] (b) shows a price floor example using a string of struggling movie theaters, all in the same city. The current equilibrium is $8 per movie ticket, with 1,800 people attending movies. The original consumer surplus is G + H + J, and producer surplus is I + K. The city government is worried that movie theaters will go out of business, reducing the entertainment options available to citizens, so it decides to impose a price floor of $12 per ticket. As a result, the quantity demanded of movie tickets falls to 1,400. The new consumer surplus is G, and the new producer surplus is H + I. In effect, the price floor    causes the area H to be transferred from consumer to producer surplus, but also causes a deadweight loss of J + K.

This analysis shows that a price ceiling, like a law establishing rent controls, will transfer some producer surplus to consumers—which helps to explain why consumers often favor them. Conversely, a price floor like a guarantee that farmers will receive a certain price for their crops will transfer some consumer surplus to producers, which explains why producers often favor them. However, both price floors and price ceilings block some transactions that buyers and sellers would have been willing to make, and creates deadweight loss. Removing such barriers, so that prices and quantities can adjust to their equilibrium level, will increase the economy’s social surplus.

Demand and supply as a social adjustment mechanism

The demand and supply model emphasizes that prices are not set only by demand or only by supply, but by the interaction between the two. In 1890, the famous economist Alfred Marshall wrote that asking whether supply or demand determined a price was like arguing “whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper.” The answer is that both blades of the demand and supply scissors are always involved.

The adjustments of equilibrium price and quantity in a market-oriented economy often occur without much government direction or oversight. If the coffee crop in Brazil suffers a terrible frost, then the supply curve of coffee shifts to the left and the price of coffee rises. Some people—call them the coffee addicts—continue to drink coffee and pay the higher price. Others switch to tea or soft drinks. No government commission is needed to figure out how to adjust coffee prices, which companies will be allowed to process the remaining supply, which supermarkets in which cities will get how much coffee to sell, or which consumers will ultimately be allowed to drink the brew. Such adjustments in response to price changes happen all the time in a market economy, often so smoothly and rapidly that we barely notice them.

Think for a moment of all the seasonal foods that are available and inexpensive at certain times of the year, like fresh corn in midsummer, but more expensive at other times of the year. People alter their diets and restaurants alter their menus in response to these fluctuations in prices without fuss or fanfare. For both the U.S. economy and the world economy as a whole, markets—that is, demand and supply—are the primary social mechanism for answering the basic questions about what is produced, how it is produced, and for whom it is produced.

Why can we not get enough of organic?

Organic food is grown without synthetic pesticides, chemical fertilizers or genetically modified seeds. In recent decades, the demand for organic products has increased dramatically. The Organic Trade Association reported sales increased from $1 billion in 1990 to $35.1 billion in 2013, more than 90% of which were sales of food products.

Why, then, are organic foods more expensive than their conventional counterparts? The answer is a clear application of the theories of supply and demand. As people have learned more about the harmful effects of chemical fertilizers, growth hormones, pesticides and the like from large-scale factory farming, our tastes and preferences for safer, organic foods have increased. This change in tastes has been reinforced by increases in income, which allow people to purchase pricier products, and has made organic foods more mainstream. This has led to an increased demand for organic foods. Graphically, the demand curve has shifted right, and we have moved up the supply curve as producers have responded to the higher prices by supplying a greater quantity.

In addition to the movement along the supply curve, we have also had an increase in the number of farmers converting to organic farming over time. This is represented by a shift to the right of the supply curve. Since both demand and supply have shifted to the right, the resulting equilibrium quantity of organic foods is definitely higher, but the price will only fall when the increase in supply is larger than the increase in demand. We may need more time before we see lower prices in organic foods. Since the production costs of these foods may remain higher than conventional farming, because organic fertilizers and pest management techniques are more expensive, they may never fully catch up with the lower prices of non-organic foods.

As a final, specific example: The Environmental Working Group’s “Dirty Dozen” list of fruits and vegetables, which test high for pesticide residue even after washing, was released in April 2013. The inclusion of strawberries on the list has led to an increase in demand for organic strawberries, resulting in both a higher equilibrium price and quantity of sales.

Consumer surplus is the gap between the price that consumers are willing to pay, based on their preferences, and the market equilibrium price. Producer surplus is the gap between the price for which producers are willing to sell a product, based on their costs, and the market equilibrium price. Social surplus is the sum of consumer surplus and producer surplus. Total surplus is larger at the equilibrium quantity and price than it will be at any other quantity and price. Deadweight loss is loss in total surplus that occurs when the economy produces at an inefficient quantity.

Questions & Answers

causes of high elasticity of demand
Onyango Reply
causes of high elasticity of supply
Onyango
I think there' s a mistake. P = - 0.4 + 0.2Qs is the supply curve and not the demand curve. Am I correct?
Valeria Reply
Qs is quantity supplied
The
This is what I think
The
this eaquation is supply curve Qs=P-0.4 the relationship is positive when the price increase the Qs increase....
mukhtaar
since Qs is quantity supplied P= -0.4 + 0.2Qs =>P +0.4=0.2Qs =>P/0.2 + 0.4=Qs I made Qs the subject of the formula or equation. So your answer is correct
The
P = -0.4 + 0.2Qs is the same as P/0.2+0.4=Qs Price has a direct relationship with the quantity supplied i.e the higher the price the higher the quantity supplied. that is why it is +0.4(this is the quantity and it is postive) and P/O.2(is the price and it is positive).
The
For the demand equation let me give an example 0.2P-0.4=Qd. Here the P is postive(+0.2) and the quantity which is -O.4 is negative( because of the negative sign(-) there is an inverse relationship between price and quantity. For quantity demanded the higher the price the lower the quantuty.
The
It's how I understand it
The
0.2P-0.4=Qd. the equation is wrong because the price have direct ralationship Quantity demanded but the correct equation is-0.2P -0.4=Qd so the higher price the lower Quantity
mukhtaar
I think the relationship is inverse because of the negative sign(-)
The
ok You mean the price and quantity demanded should be negative(inverse relationship) for Qd and the price and quantity supplied should be postive(direct relationship) for Qs
The
thank you for the correction
The
yes because it got a positive gradient of +0.2
Michael
This is the mistake I found: "Since P is on the vertical axis, it is easiest if you solve each equation for P. The demand curve is then P = 8 – 0.5Qd and the demand curve is P = –0.4 + 0.2Qs. Note that the vertical intercepts are 8 and –0.4, and the slopes are –0.5 for demand and 0.2 for supply."
Valeria
dear price do not depend on quantity. rather quantity depends on price. so the equation should be Qty=0.2Px-0.4
Michael
please can someone generate supply equation for me
David Reply
ok
Detto
Qs=f(P,Pr,G,E,Z,Pf,)
The
where p is price, Pr is price of related goods, G is goals of a firm E is supplier's future expectation of prices,Z is other related factors, Pf is cost of factors of production.
The
I think it's wrong
The
if Qd=90-p Qs=90+p
The
the coefficient of price must be positive since supply curve is positively slopping
Kotey
yes
The
it's true. thank you
The
welcome
Kotey
ok
The
diagram of perfectly inelastic
Muhd Reply
chi-square test is used to test A. Analysis of variance B. Association between the qualitative variables C. Difference between means of two distribution drawn from the same population D. Difference between the means of two distribution drawn from different population
Syk Reply
the Answer Should Be D
Amanuel
Confirm?
Syk
A
Satyanarayana
The answers is D
Lawrence
Thank you
Syk
What is economic?
bilya
is the system that study the difference between resources and the growth population
Messi
Economics studies humanbehaviour as a relation between ends and scarce means which have alternative uses
Kotey
rigth .....but economic has different concepts
Messi
yes
Kotey
what is equilibrium
Obed Reply
it is that point where price is equal to output or rather a point where demand is equal to supply
Fung
it is a point where consumer get maximum satisfaction and producers maximise profit or minimise loss
Imtiyaz
thanks
Obed
supply equal demand in one point
Messi
it's a point where supply and demand meets/equal whether profit or loss
deany
how to compute budget constraint
Kristine Reply
how to calculate balance of payment deficit
Fung
How to calculate National income
Obed
what,how and for whom to produce
kunle Reply
those are problem that producer face in the process of production due to scarcity
Richman
gm
Diodo
a particular selected product is produced in a systematic hygiene condition and is produced for the customers.
Madhu
what are the factors of economic growth?
Povuuro Reply
tax, imports and exports, etc
deany
welcome on board
Emmanuel
Explain the paradox of poverty in the midst of plenty?
moses Reply
total production diagram explain
Udayan Reply
what is the formula of price elasticity demand
Sherry Reply
%change in Quantity demand/%change in price
how
%change QD / %change P
Addin
How can hight interest rate affect the level of GDP?
Yori Reply
simple because of high interest it become revenue for our nation and it self it also rise our national income or GDP
Madhu
how does the government regulate markets and improve market outcomes
Ranveer Reply
The government tries to combatmarket inequities through regulation, taxation, and subsidies. ... Examples of this include breaking up monopolies and regulating negative externalities like pollution. 
Addin
Governments may sometimes intervene in markets to promote other goals, such as national unity and advancement.
Addin
by applying and regulating fiscal and montary policy the concerned govt can improve almost all markets
Khushal
hello
Rock
it does not improve
Hugon
Give the differences between labor&financial markets
Andrew Reply
this is the differences
Abubakar

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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