Demand and Marginal Benefit
Demand, Willingness to Pay, and Value
The value of one more unit of a good or service is its marginal benefit. Marginal benefit is the maximum price that people are willing to pay for another unit of a good or service. And the willingness to pay for a good or service determines the demand for it. So the demand curve for a good or service is also its marginal benefit curve.
The market demand curve is the horizontal sum of the individual demand curves and is formed by adding the quantities demanded by all the individuals at each price.
The demand curve in the figure shows that the maximum price a person is willing to pay for the 6 millionth gallon of milk per month is $3, so $3 is the marginal benefit of this gallon.
MSB curve: The market demand curve is also the economy’s marginal social benefit (MSB) curve. It reflects the number of dollars’ worth of other goods and services willingly given up to obtain one more unit of a good.
The figure shows that the maximum price a consumer is willing and able to pay for the 6 millionth gallon of milk is $3, so the marginal social benefit of the 6 millionth gallon of milk is $3.
Consumer surplus is the value (or marginal benefit) of the good minus the price paid for it, summed over the quantity bought. The figure illustrates the consumer surplus as the shaded triangle when the price is $3 per gallon.
Supply and Marginal Cost
Supply, Cost, and Minimum Supply-Price
The cost of producing one more unit of a good or service is its marginal cost. Marginal cost is the minimum price that producers must receive to induce them to produce another unit of the good or service. And the minimum acceptable price determines the quantity supplied. So the supply curve for a good or service is also its marginal cost curve.
The market supply curve is the horizontal sum of the individual supply curves and is formed by adding the quantities supplied by all the producers at each price.
MSC curve: The market supply curve is the economy’s marginal social cost (MSC) curve.
The supply curve in the figure shows that the minimum price a producer must receive to be willing to produce the 6 millionth gallon of milk per month is $3, so $3 is the marginal social cost of this gallon.
Producer surplus is the price of a good minus its minimum supply-price (or marginal cost), summed over the quantity sold. The figure illustrates the producer surplus as the shaded triangle when the price is $3 per gallon.
Government Actions in Markets
Government intervention in markets—using price controls, taxes, quotas, and making products illegal—can affect the price and quantity in those markets.
Government intervention affects the efficiency of markets and can lead to the creation of deadweight losses.
I. A Housing Market With a Rent Ceiling
A price ceiling is a government regulation that makes it illegal to charge a price higher than a specified level. When a price ceiling is applied to a housing market it is called a rent ceiling.
A rent ceiling set above the equilibrium rent has no effect on the market.
A rent ceiling set below the equilibrium rent creates a housing shortage, increased search activity, and a black market.
A Housing Shortage
If the government imposes a rent ceiling below the equilibrium rent, then a shortage results. In the figure the equilibrium rent is $400 per month and the equilibrium quantity of units rented is 3,000. If the government imposes a rent ceiling of $200 per month, a shortage results. The quantity demanded at that price is 5,000 and the quantity supplied is 1,000. There is a shortage of 4,000 apartments per month.
Rent ceilings lead to inefficiency. In a competitive market, the equilibrium quantity is the same as the efficient quantity. In a housing market with a rent ceiling, the quantity of units available is less than the equilibrium quantity and so is less than the efficient quantity. The market underproduces, and there is a deadweight loss, as shown in the…