Chapter 5, Problem 10P

To determine

1. Consumer and producer surplus before the introduction of price ceiling.
2. Consumer Surplus after introduction of price ceiling.
3. Producer surplus after the introduction of price ceiling.
4. Portion of producer surplus transferred to consumer surplus with introduction of price ceiling.
5. Deadweight loss caused due to price ceiling.

Concept Introduction

Consumer Surplus: Consumer surplus is the surplus occurring due to a difference in the amount that a consumer is willing to pay for a good or service and the amount that is actually paid by the consumer.

Producer Surplus: Producer surplus is the surplus occurring due to a difference in the amount at which a good or service is sold by the producer and the amount at which the producer is willing to sell the good or service.

Price Ceiling: In the situation of crisis, when the prices are expected to rise suddenly, the government imposes ceilings on the price to ensure that the prices are not charged unreasonably and therefore, the price cannot be increased beyond that ceiling.

Deadweight Loss: Deadweight loss is a situation when there is a loss suffered due to inefficiency in the market, when the equilibrium point is not achieved.