is the branch of economics that studies decision making for the economy as a whole.

shows the quantity demanded at different prices. essentially, it shows the quantity a demander is willing to buy at different prices.

When there is a surplus, sellers have an incentive to decrease their price and buyers have an incentive to offer lower prices. 

When there is a shortage, sellers have an incentive to increase the price and buyers have an incentive to offer higher prices. T

 A free market _______the gains from trade. The gains from trade can be broken down into producer surplus and consumer surplus, so we can also say that a free market _______ producer plus consumer surplus.

1. The supply of goods is bought by the buyers with the highest willingness to pay.

2. The supply of goods is sold by the sellers with the lowest costs. 3. Between buyers and sellers, there are no unexploited gains from trade and

no wasteful trades. 

Price Ceilings Create Wasteful Lines At the controlled price, the quantity of gasoline supplied is Qs and buyers are willing to pay as much as $3 for a gallon of gasoline. But the maximum price that sellers can charge is $1. The difference between what buyers are willing

to pay and what sellers can charge encourages buyers to line up to buy gasoline. Buyers will line up until the total price of gasoline, the out-of-pocket price plus the time cost, increases to $3 per gallon. Time spent waiting in line is wasted time. The total value of wasted time is given by the time cost per gallon multiplied by the quantity of gallons bought.

A Price Ceiling Reduces the Gains from Trade At the controlled price, Qs units are supplied and buyers are willing to pay just slightly less than $3 for an additional gallon of gasoline that sellers are willing to sell for just slightly more than $1. Although mutually profitable, these trades are illegal. If all mutually profitable trades were legal, the gains from trade would increase by the green plus blue triangle.

When the price of oil is high, oil will only be used in the higher- valued uses. As the price falls, oil will also be used in lower-valued uses.

In a Free Market Goods Flow to Their Highest-Value Uses If all units of the good are allocated to the highest-valued uses, then consumer surplus is the area between the demand curve and the price up to the quantity supplied.

Consumer Surplus Falls Under Random Allocation When there is a price control, the buyers with the highest-valued uses cannot outbid other buyers, so goods will flow to any buyer willing to pay more than the controlled price of $6. If goods are allocated randomly to buyers with values between

$30 and $6, the average value will be $18. Consumer surplus under random allocation is the green area. If goods were allocated to the highest-valued uses, consumer surplus would be larger, the red plus green areas. Thus, a price control misallocates resources, reducing consumer surplus.

1/2 30 + 1/2 6

Rent Control Creates Larger Shortages in the Long Run than in the Short Run A rent control below the equilibrium price generates a shortage. The short-run shortage is small since the apartment units are already built. In the long run, fewer new units are built and old apartments are torn down or turned into condominiums so the long-run shortage is much greater

A Price Floor Creates a Surplus (Minimum Wages Create Unemployment) At the minimum wage, the quantity demanded of labor falls below the market employment level and the quantity supplied rises, creating a surplus of labor.

A Price Floor Creates Quality Waste At the CAB-regulated fare, price is well above a seller’s willingness to sell. Sellers cannot compete by offering lower prices so they compete by offering higher quality. Higher quality raises costs and reduces seller profit. Buyers enjoy the higher quality, but would prefer less quality at a lower price. Thus, the price floor encourages sellers to waste resources by producing more quality than buyers are willing to pay for.

Landlocked Nations Have Lower GDP per Capita