EC120 Chapter Notes - Chapter 5: Economic Surplus, Deadweight Loss, Longrun

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3 Oct 2018
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EC120 Full Course Notes
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In a free market the equilibrium price equates the quantity demanded with the quantity supplied. Government price controls are policies that attempt to hold the price at some disequilibrium value. Some controls hold the market price below its equilibrium value, thus creating a shortage at the controlled price. Other controls hold price above its equilibrium value, thus creating a surplus at the controlled price. Any voluntary market transaction requires both a willing buyer and a willing seller. If quantity demanded is less than quantity supplied, demand will determine the amount actually exchanged, while the rest of the quantity supplied will remain in the hands of unsuccessful sellers. If quantity demanded exceeds quantity, supplied, supply will determine the amount actually exchanged, while the rest of the quantity demanded will represent unsatisfied demand of would-be buyers. At any disequilibrium price, quantity exchanged is determined by the lesser of quantity demanded or quantity supplied.

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