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?

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Answer 1

Supply Suppy K H floor EO E BNE H Demand Surplus Prontily Surplus. Puantity

In the graph above, demand is inelastic in left diagram while demand is elastic in right diagram. Equilibrium in both diagram occurs at point E0.

Deadweight loss when demand is inelastic is area of portiom A + B while deadweight loss while elastic demand is area of portion C + D. Surplus is higher when demand is elastic. Thus, we can say that price floor is more effective when demand is elastic.