Market Equilibrium and Price Controls

Market Equilibrium and Price Controls

Equilibrium

Equilibrium occurs where the supply curve and the demand curve intersect. The resulting price is called the Equilibrium Price (Pe). At the equilibrium price the seller and the buyer are both willing to do business.

Market Equilibrium

Consumer and Producer Surplus

When market equilibrium occurs, benefits from trade for both the buyer and seller (consumer and producer) are maximized. The benefit for the buyer is called Consumer Surplus. The consumer surplus is the difference between the maximum amount a buyer is willing to pay for a good, and the amount that they actually paid for the good. The benefit for the seller is called Producer Surplus. The producer surplus is the different between the lowest amount that a seller will sell for, and the amount that they actually paid for it.

Price Controls

Price Controls are minimum and maximum prices set by a government. Example: If a maximum price is set for steak, more buyers will have the money required to buy it. This maximum set price is called a price ceiling. However, if this price ceiling is below the market equilibrium, whats known as a shortage will occur. 

Price ceiling set at Pc and resulting shortage.

A Price Floor is the opposite of a price ceiling. A price floor is a set minimum price at which a buyer may purchase a good. If the price floor is above the equilibrium price a surplus will result.

Price floor set at Pf and the resulting Surplus.

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