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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

Discuss the differences between taste and flavor, including how other sensory inputs contribute to our  perception of flavor.
John Reply
taste refers to your understanding of the flavor . while flavor one The other hand is refers to sort of just a blend things.
Faith
While taste primarily relies on our taste buds, flavor involves a complex interplay between taste and aroma
Kamara
which drugs can we use for ulcers
Ummi Reply
omeprazole
Kamara
what
Renee
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Renee
is a drug
Kamara
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Kamara
Omeprazole Cimetidine / Tagament For the complicated once ulcer - kit
Patrick
what is the function of lymphatic system
Nency Reply
Not really sure
Eli
to drain extracellular fluid all over the body.
asegid
The lymphatic system plays several crucial roles in the human body, functioning as a key component of the immune system and contributing to the maintenance of fluid balance. Its main functions include: 1. Immune Response: The lymphatic system produces and transports lymphocytes, which are a type of
asegid
to transport fluids fats proteins and lymphocytes to the blood stream as lymph
Adama
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Oyindarmola Reply
Anatomy is the identification and description of the structures of living things
Kamara
what's the difference between anatomy and physiology
Oyerinde Reply
Anatomy is the study of the structure of the body, while physiology is the study of the function of the body. Anatomy looks at the body's organs and systems, while physiology looks at how those organs and systems work together to keep the body functioning.
AI-Robot
what is enzymes all about?
Mohammed Reply
Enzymes are proteins that help speed up chemical reactions in our bodies. Enzymes are essential for digestion, liver function and much more. Too much or too little of a certain enzyme can cause health problems
Kamara
yes
Prince
how does the stomach protect itself from the damaging effects of HCl
Wulku Reply
little girl okay how does the stomach protect itself from the damaging effect of HCL
Wulku
it is because of the enzyme that the stomach produce that help the stomach from the damaging effect of HCL
Kamara
function of digestive system
Ali Reply
function of digestive
Ali
the diagram of the lungs
Adaeze Reply
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Diya Reply
37 degrees selcius
Xolo
37°c
Stephanie
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Mark
36.5
Simon
37°c
Iyogho
the normal temperature is 37°c or 98.6 °Fahrenheit is important for maintaining the homeostasis in the body the body regular this temperature through the process called thermoregulation which involves brain skin muscle and other organ working together to maintain stable internal temperature
Stephanie
37A c
Wulku
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Diya Reply
anaemia is the decrease in RBC count hemoglobin count and PVC count
Eniola
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Diya Reply
how does Lysin attack pathogens
Diya
acid
Mary
I information on anatomy position and digestive system and there enzyme
Elisha Reply
anatomy of the female external genitalia
Muhammad Reply
Organ Systems Of The Human Body (Continued) Organ Systems Of The Human Body (Continued)
Theophilus Reply
what's lochia albra
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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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