Market price - this is the mechanism in which the market ends up clearing

Demand is the willingness and ability to purchase something you want

Law of diminishing marginal benefit/utility
Each extra unit gives you less extra satisfaction than the previous extra unit
Therefore you are willing to pay less
(You are willing to pay the same price for a pizza after you had many beforehand)

Marginal benefit curve is always going downwards

Using willingness to pay as a proxy to measure marginal benefit
Will use the marginal benefit curve as the demand curve because they both measure willingness to
pay

Market demand
Each person has a different willingness and ability to pay so each person has a different demand
curve
We add each individual quantity demanded to get the market demand
The curve will be flatter because you have larger quantity demanded for the same price
It will not be a perfect straight line depending on the demand curve of the individuals

Supply - willingness and ability to sell

Marginal cost - extra cost of producing 1 extra unit
Marginal cost is upward sloping
Costs: land, labor, capital, enterprise
Rent, wage, interest, profit
This includes some of the minimum payment for enterprise; it is included in the cost
Marginal cost is the same as supply
It is the minimum price that a firm is willing to sell for
To get the market supply we just add the quantity supplied from all the individual supply curves
It is the horizontal sum of individual supply curves
It will also be flatter
Consumer surplus
How much were you willing and able to pay? Minus how much you actually pay
(Prior to you knowing what the market price will be)
E.g. I was willing to pay 1000 for a computer, and I find out it is 600, then consumer surplus is 400

Producer surplus
We constructed the supply curve by adding individual quantities from their curves
This is the difference between the actual price minus what you were willing and able to sell for
Consumer surplus + producer surplus = total surplus

Allocative efficiency
Marginal benefit = Marginal cost
Total surplus is maximized
Deadweight loss = 0
Total surplus is smaller if we under produce
If we under produce (do not produce to equilibrium) we may miss out on some total surplus, and
any amount we miss out on then it is deadweight loss
If you overproduce more than equilibrium quantity
We get a negative area, because the marginal cost is greater than the marginal benefit
It is also referred to a deadweight loss
Price ceiling is the maximum price imposed to a good or service to protect consumers
If there is a shortage, then there the amount supplied is the amount consumers can buy so the
consumers that have bought the scarce amount for a lower price has benefited but then the
consumers that cannot get it has suffered
Therefore not all consumers are better off with the price ceiling if it capped below equilibrium price

Producer surplus will always go down if price ceiling is less than equilibrium
But consumer surplus will depend
Some consumers will benefit, but some will be disadvantaged
If you add the two it will be smaller
Because we had a deadweight loss
Incentive to create black market activity or search activity because there is a shortage
Consumers potentially sacrifice some consumer surplus for search activity or black market activity

Price floor is a legal minimum price

E.g. labor market
E.g. equilibrium wage is 9 dollars and hour, but price floor is 10 dollars and hour
Demand is firms because the firms want workers
Supply is workers because they are selling their labor
The quantity traded will be the lowest on the supply spectrum

Because there is a price floor over the equilibrium, then there is a surplus of supply
In this case it would be unemployment
Intention is the protect suppliers
In this case support workers
Price ceiling or price floor, the quantity traded will always be smaller
Consumer surplus would have gotten smaller
Producer surplus depends on other factors because of the deadweight loss
Change is ambiguous (as some suppliers are benefited, but some are not)
But total surplus with price floor will be smaller
Sellers are willing to give up their potential surplus via search training (e.g. through education) or
illegal (under table transactions)

Taxes (per unit)

Shifts the supply curve upwards by the value of the tax