Question 1

Why would the suppliers not want to supply more than the point in the middle of the graph?

Accepted Answer

Because either they won't be able to sell any of that product, or they won't make a profit in doing so. Here's why:

The demand curve is downward pointing because every subsequent copy of a product bought by a consumer is less valuable than the last. To put it simply, lets say you buy one orange, then two, then three until you have 100 oranges. By this point you're starting to get pretty damn sick of oranges, you won't have time to eat them all before they go rotten etc. If you have no oranges and buy one, you are now gain +5 happiness. the next orange adds +4 happiness, the next adds +3 and so on. Total happiness is still increasing from 5 to 9 to 12, but the individual happiness of each individual orange is decreasing. Economists have simply called this marginal benefit and the law of diminishing marginal returns.

The exact same thing happens for suppliers, and it's called marginal cost. In this case every subsequent orange costs more than the last one to grow and harvest. Why is this the case? Because now we need to hire more people and more farming space to produce more oranges, it now costs companies more for each individual orange that is produced.

Combine these two forces together and this is what happens: Consumers want lots of oranges, some consumers are orange lovers and will be prepared to pay lots for oranges (left side of demand curve), some are casual consumers who will only buy them if the price is right (right side of demand curve). The same thing happens for suppliers. Some suppliers have more fertile soil, or can hire staff cheaper. They are prepared to sell their oranges for a small price (left side of supply curve), while others have more costly land and staff and have to charge more per orange (right side of demand curve.)

This means that the people on the right side of the demand curve have to pay the EQ price just to buy oranges. They think that this price is too high (price is greater than happiness recieved from oranges) and will not buy them at the EQ price. If the price is lowered they would however.

Unfortunately suppliers on the right side can't afford to sell oranges at the EQ price.  Their cost base is too high and they could only sell oranges at a higher price. They would sell more oranges at a higher price.

You can see the problem now. To supply more oranges we have to raise the price, but then less oranges will be bought by consumers. We could lower the price, but then orange suppliers would start leaving the market. The EQ position is the most efficient compromise between consumers and producers.

Hope that it helps! :)

Question 2

Sal talks about "Deadweight loss," but is society really losing money? Where does that loss of money go?

Accepted Answer

Society, more precisely, members of the society will lose well-being, the term "losing money" does not mean much in the context. Just consider this: if I raise the price of gasoline by 100%, people will not "lose money", people just won't be able to afford to buy as much gasoline as before.
The same applies to all these deadweight loss examples: people do not lose money in the natural sense. There are simply people who could not benefit from voluntary exchange because of the rent control and this means a well-being loss for them.

Question 3

What would the consequence of increasing a price ceiling be? For example, applying this to a real world scenario, UK tuition fee caps tripled from 3k to 9k a few years ago - what would this do to the market?

Accepted Answer

Increasing the ceiling (bringing it closer to equilibrium) would decrease the effects of the price ceiling.

Question 4

I don't understand. Shouldn't the new price ceiling price line (the dotted white one) be drawn all the way to the demand curve? Why did Sal stop drawing it when it touches the supply curve. If he draws it and it touches the demand curve, then the consumer surplus would actually be greater than before.

Accepted Answer

The reason Sal stopped the dotted white line at the Supply line, is because the suppliers won't produce more than that point, since Marginal Benefit equals Marginal Cost, and producing more will not be profitable for them.

You can draw the line to the Demand line for yourself, and see that the producer surplus would drastically drop (you have to subtract the area UNDER the supplier line. The consumer surplus would indeed increase, IF suppliers would produce more than the market equilibrium, but that's the case for every scenario

Question 5

How about " the black market" if price ceiling apply to it.

Accepted Answer

The other way of thinking about a black market when you have a price ceiling on the regular market is that a price ceiling creates a shortage. IE if bread is capped at 25 cents you will get long lines and run out of bread (IE USSR in the 1980s).  Above the equilibrium point you will have a new supply curve (of producers willing to skirt the law) and demand from people willing to skirt the law).  The slope of these lines will likely be different than the original supply and demand curve but where these intersect you will have a "black market clearing price".

Question 6

I'd like to know what happens to the deadweight loss. Would it go to the government since they set the price ceiling?

Accepted Answer

That's the thinking behind the whole idea of the deadweight loss: it does not go to anybody. It is lost welfare.

Question 7

Can anything else cause a deadweight loss or is it basically just artificial causes such as the price ceiling from this video?

Accepted Answer

There are a few things that can create deadweight losses:
1. Price ceilings
2. Price floors
3. Taxes
4. Subsidies

EDIT: it was pointed out to me I was wrong. There are multiple other, natural, causes of a dead weight loss.
5. Monopolies, oligopolies, and monopolistic competitive firms (that covers most firms in the US economy) 
6. Externalities (like pollution and second hand smoke)
7. Non-rival (like street-lights) and non-exclusive goods (like fish in the ocean)
8. Asymmetric information (like insider trading or improper identification of the side-effects of taking a drug, etc.)

Question 8

What happened to the other 1m sqft of rental space when the cap hit?

Accepted Answer

Many times, the leftover space that does not get rented out ends up either not being taken care of (basically, the landowner is lowering that marginal cost curve to match the lower price that was forced on them) or if that doesn't lower their costs well enough they end up trying to get that space off their hands. Often, that leftover space turns into an abandoned building.

Question 9

Is the price ceiling always place under the market equilibrium price?

Accepted Answer

In theory it's possible that there's a price ceiling above the market equilibrium price. But in practice you probably will never see one. The goal of a price ceiling is to protect customers from high prices. So a government might decide that to keep rice affordable they enforce a price ceiling of $10 per kilo. But if the current market price for rice is $5 per kilo there's no problem of unaffordable rice, so the government would probably never set up the price ceiling in the first place; it would be useless.

AP®︎/College Microeconomics

Course: AP®︎/College Microeconomics > Unit 2

Rent control and deadweight loss

Want to join the conversation?

Video transcript