Question

Draw two supply/demand graphs, one with a highly elastic demand and the other with a highly inelastic demand. (If you don’t know what this means, review elasticity.) Give your two supply curves a similar slope and make the equilibrium price the same for both graphs.   On each graph put a price floor at the same level and identify the surplus and deadweight loss. In which case is the effect from the price floor larger?

Answer 1

ELASTIC DEMAND PRICE (P) IN ELASTIC DEMAND P 98 SS DEADWEIGHT Loss CONSUMER CONSUMER Surnus SURPUS DEAD WETUHT LOSS PE ER PRICE Pe PRICE FLOOR Floor pl PRODUCER SURPLUS - - DDE - PRODUCER'S SURPUS 1 DDE Bé ge QUANTITY(Q) di Di a SURPLUS SURPLUS

In an elastic demand curve, the consumer surplus is less than an inelastic demand curve. This is because in elastic demand, consumers are paying their maximum willingness to pay. The deadweight loss for an inelastic demand curve is very small, whereas the deadweight loss for an elastic demand curve is large.
From the above diagram, we can infer that the surplus is more for elastic demand and less for inelastic demand. As a result, the market with elastic demand curve will be effected more from the price flooring. Price floorings, in general, will increase the prices above the equilibrium price level. For inelastic demand, the change in price will not effect the quantity demanded as a result, the deadweight loss is less and the surplus of supply is also less. Similarly, for elastic demand, price will highly affect the quantity demanded. As a result, the deadweight loss will be more and so is the surplus.