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Main content
Current time:0:00Total duration:8:43
AP.MICRO:
POL‑1 (EU)
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POL‑1.A (LO)
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POL‑1.A.1 (EK)
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POL‑1.A.4 (EK)
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POL‑1.A.5 (EK)

Video transcript

what we're going to talk about in this video is the effect of price controls on changing how the surplus the total surplus is reallocated between consumers and producers and we already touch on this in other videos the video on rent control the video on minimum wages and so this is to make sure that we are taking away some of the big ideas so right over here I have my classic demand and supply curves for say the rental market at a high price the quantity demanded is low and the quantity that people would be willing to supply is quite high and at a low price the quantity that people would be willing to supply is low while the quantity demanded would be quite high and we've seen from many videos so far in our journey through economics that we have our equilibrium price in our equilibrium quantity where these two curves or lines intersect so I'll call this Q sub zero and this is price Sub Zero but let's say for whatever reason city officials in this city where that this rental market that this chart describes the rental market for and they decide that P Sub Zero is too high that their voters are complaining that rents are too high in the market and so the city decides to put in a price control and in this case they try to implement a price ceiling so they say look the price of rent per square foot per month cannot go above this level right over here so this is the price ceiling price ceiling right over there now what's going to happen here well if this is the price ceiling then right over here this is the total amount of square footage the quantity of my guest square footage that is being willing that people are willing to supply that I guess you could say landlords or building owners are willing to supply but at this price you have a much higher quantity that is being demanded so this is right over here is the quantity demanded and when the quantity demand price is higher than the quantity supplied well then you have a shortage so this right over here is describing a shortage and we talked about that in other videos but let's think about what's happening to the total surplus so when we let the market just get to an equilibrium price in quantity the total surplus actually let me just draw separately the consumer and the producer surplus so this was the consumer surplus right over here before the government intervention and then this is the producer surplus we've talked about this in other videos but now what happens when we have this price control well this is the quantity supplied now all of a sudden the total surplus shrinks the total surplus is now being depicted by this white trapezoid and also think about how things have shifted so one thing that you see clearly what is the producer surplus now the producer surplus is only this little yellow try or this little I don't know my colors this little blue triangle at the bottom so you see very clearly that all producers suffer here all producers all producers suffer now you might say well of course this is a rent control but surely the consumers will benefit here well it isn't the case it is the case that some consumers the ones that are able to get into a unit they might benefit so this right over here some demanders or you could say some consumers consumers benefit but not all of the consumers benefit in fact you have a shortage now before you had more people who were able to get housing now these folks are not going to get the housing and as in all of economics you should take a grain of salt in any type of oversimplified model like this or simplified this is actually a very useful model for thinking about certain things because even these consumers that are benefitting according to this model for these consumers it looks like their surplus has grown or if you're if you're this kind of marginal renter right over here let me draw it over here if you were the marginal renter that was before getting this much benefit now you're able to get that plus all of that but think about the things that this model is not capturing what's the incentive for the landlord now would they want to invest in the building as much would they or they will they maybe let the building kind of suffer a little bit and there's also particular quirks for how rent control is implemented that might also change behavior so always keep in mind that with what's not captured by the model but in broad brush terms you put in a price control in this case you put in a price ceiling you're going to create a shortage all the producers are going to suffer some of the consumers benefit according to this model but not all of them because not all of them are go now going to be able to get a place to rent now let's move over to another market let's say the corn market and let's say once again we have our equilibrium price and our equilibrium quantity so price of equilibrium and this is our quantity sub equilibrium but let's say in this situation the government let's say the farmer the corn farmers are able to organize and they're able to lobby the government and say hey we really suffer when there's low corn prices so where you want to institute a price control we want you to institute a price control we want a price floor so the government says ok corn farmers you seem to be pretty serious about it so we are going to institute a price floor so the price cannot go below this level so this is a price floor well what's going to happen now well let's think about the quantity demanded and the quantity supplied so that right over there is the quantity demanded we see wherein the price intersects the demand curve and this right over here is a quantity supplied where we're intersecting the supply curve quantity supplied so in this situation your demand is less the quantity demanded is less than the quantity supplied so in this case you have a surplus the farmers would want to produce more than people would want at that price and I was thinking what happens to that's total surplus and in particular the consumer and the producer surpluses so in the old world this was the consumer surplus and this right over here is the producer surplus in the new world the total surplus shrinks the sum of the two we're now talking about this the area of this trapezoid right over here this sideways trapezoid and you see that all consumers suffer because now the consumer surplus has been shrunk right over the consumer surpluses right over here there's consumers who are now not even consuming corn and even the ones that are consuming corn before let's say this marginal consumer right over here was getting all of this benefit now they are getting a smaller benefit so we could say all all consumers suffer now what about the producers well the producers who are able to sell their corn definitely get a benefit so if you were this marginal producer right over here your your surplus right over here would have been like that but now you get even a higher price for it and so one way to think about it is some producers some producers for Shore benefit according to this model so let me write that so some producers producers benefit but it's important to realize once again that not all of the producers benefit because once again we have a surplus if it's implemented this way well you might have a lot of farmers who aren't even able to sell their corn to that at that price so it's an interesting thing to think about you should always take models with a grain of salt but it is a pretty interesting framework where governments often will try to do some type of knee-jerk solution to try to make something look good or feel good to their constituents but the end effect is that people might suffer more than they expect it might cause a shortage when you put a price ceiling or it might cause a surplus when you have a price floor