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Current time:0:00Total duration:11:12

AP.MICRO:

POL‑1 (EU)

, POL‑1.A (LO)

, POL‑1.A.1 (EK)

let's think about the market for real estate in a given City so here on the vertical axis I have plotted rent in terms of dollars per square foot per month here on the horizontal axis is is essentially the the quantity of square foot square foot per month available in millions so this is 1 million 2 million 3 million 4 million 5 million here in blue we have the demand curve and you see is as you have as as the price is high the demand one way to view it is that the demand for square footage is low and as the price is low the demand for square footage is higher but what I really want to focus on in this video is viewing the demand curve is the marginal benefit curve marginal benefit curve so when you when the write that first incremental square foot that is added to the market that has a huge marginal benefit but people were desperate to get an apartment to get someplace where they could rent and they could live so it has a huge marginal benefit and then the marginal benefit for every incremental square foot starts to go starts to go down likewise we can look at the supply curve and we're going to look at this as the marginal cost curve as the marginal cost curve so the marginal cost of that very first incremental square foot for the suppliers for the landlord's in the city is $1.00 per square foot so one way to think about it that very first square foot we don't know what its price would have been but let's say that it's it's price was at $3 if it was and I'm just making that up in that reality if the if that very first square foots price was at $3 it would definitely there's definitely an incentive for someone to make that first square foot because their marginal cost is only $1 and they could rent it out at $3 per month and there's definitely a incentive for someone to rent it the marginal benefit is $4 and they just have to pay $3 for it so it could be it could be rented out for anywhere or it would exist or this kind of transaction would happen as long as its price was within between 1 and 4 dollars but you can imagine based on how this is drawn where the actual equilibrium price is the suppliers will keep adding more in more square foot as long as they can actually rent it out all the way and until the point that the marginal benefit is equal to the marginal cost so it's right over here marginal benefit is equal to marginal cost it wouldn't make sense for suppliers to produce an incremental square foot right over here if they produce an incremental square foot their marginal cost has gone beyond three dollars while the marginal benefit is below three dollars no one is going to rent that thing out so we reach an equilibrium at two million we reach an equilibrium point at two million square feet per month on the market let me make that line a little bit straighter two million square foot per month on the market and at a price of three dollars three dollars per square foot per month and you can look at the total surplus here in this equilibrium scenario we can calculate the consumer surplus so all of these folks this first for this increment this first incremental foot someone was willing to pay four dollars per square foot they only have to pay three the next one a little less than four dollars benefit they only have to pay three all the way to this point right over here so the area of this triangle right over here this right over here is the consumer surplus so that right over here is consumer surplus sumer surplus and we can calculate it this is a triangle I'm assuming actually both the supply and demand curves or lines so let's see this has a height of one and it has a base of two and so it's area is going to be one times two times one half so that's going to be equal to one that's going to be equal to 1 million dollars we're multiplying $1 times 2 million times one half so that's going to be one million dollars of consumer surplus per month let's think about the producer surplus well the producer surplus is going to be this area it's going to be this area right over here that first incremental foot it only cost those producers $1 but they're able to sell it for $3 so that's that's that or rent it out for $3 and then they will keep pretty keep producing all the way until they do two million square foot and for all of their square feet they're able to rent it out for more than it was the cost to produce it so the area of this triangle is the producer surplus this is the producer surplus producer surplus the producer surplus and we can calculate that as well the height right over here is $2 $2 times this width is 2 million square feet per month 2 times 2 times 1/2 is 2 so this is equal to 2 million 2 million dollars so if we were to talk about what the total surplus is it is 3 it is 3 million dollars now this equilibrium rent $3.00 per square foot per month is actually quite a lot for a thousand square foot apartment my last apartment was a a 2-bedroom 2-bath apartment it was about a thousand square foot so that means you're going to be paying $30,000 per month for that so that's pretty high rent that's the type of rent that you might pay in a city like San Francisco and let's say people start complaining about it and so the government says ok that rent is not fair is too high we want to introduce some type of price control we want to introduce rent control rent control and I'm over oversimplifying how this works but just to just so that we can deal with this model right over here let's say that the city just sets a ceiling on the price per square foot per month so let's just say that they say it set a price ceiling a price ceiling of $2 per square foot per month $2 per square foot per square foot let me write it this way two dollars per square square foot per month so they set a price ceiling they set a price ceiling right over here so given that what is going to happen what is going to happen and what I really want to think about is what is going to be the new consumer surplus and the new producer surplus and I encourage you to pause the video and try to think about that on your well let's think about what's going to happen from the producers point of view it doesn't make sense for them to produce more than 1 million units with that 1 million square feet per month or I have have rent it or rent out more than a million square feet per month because that extra square foot above that it's marginal cost is going to be more than what they're going to get so the producers are just going to stop there and so the producer surplus is going to be the area of this triangle right over here and let's see this is to the Ox re this is $1 times 1 million times 1/2 so this is a now a producer surplus producer surplus a new producer surplus under the rent control of $500,000 half a million five hundred five hundred thousand dollars so we see that the rent control immediately hit the producer is pretty hard the producer surplus has gone down dramatically now what about the consumer surplus so we're talking about a million units so the consumer or million square foot per month I should say so now the new the new consumer surplus is the area is the is this is this entire area and so you see that the at least for this first incremental million square feet the consumers have started to win out a little bit and to figure this out what the total area is we just need to figure out what we could break this up into two sections we could break this up into two sections and this is the point 1 million square feet at three and a half dollars per square foot per month this is right over here the point three point five so we could use that to figure out this this new area and actually let me do it in a different color in this green this green area right over here what is it going to be well the area of this thing right over here is 1/2 hi 1/2 times 1 times 1/2 so this is going to be this right over here it's 250 K and we add that to this area right over here which is one and a half one and a half times one one and a half dollars per square foot per month times 1 million do you do that right yep so that's going to be plus so that plus this which is 1.5 million you add these two together the total consumer surplus so the consumer surplus the total consumer surplus is now 1.75 million 1.75 million so the consumer surplus definitely did go up in total because it gained all of this from the producer but let's think about what has now happened in our society or in our city we the producers definitely don't want to put out as many square foot for rent anymore and it does look like we have lost some total surplus for our for our little city here we have lost out on this entire area and we can calculate it by looking at what the total surplus was before the rent control and what the turtle total surplus was after the rent control the total surplus before so before the total surplus was the two million producer surplus plus the 1 million consumer surplus so it was 3 million after it is the 1.75 million consumer surplus plus the 500,000 producer surplus which is 2.25 million 2.25 million and so what we've lost what we've lost is the difference here which is seven hundred seven hundred and fifty thousand dollars so this area right over here and this is per month this right over here represents the lost the lost total surplus and this lost total surplus is $750,000 per month is referred to as the deadweight deadweight loss so you can debate about rent control and is it good is it bad is it good for the for this kind of dynamic who gets what share of the surplus and this of course is an oversimplification of a market and even the way rent control would be instituted but this is a model for beginning to think about whether I guess what what happens to the total surplus these types of price control price controls are instituted