Unit 1: Basic Economic Concepts

Scarcity

Scarcity and Choice

• Scarcity is the fundamental economic problem of having limited resources to satisfy unlimited wants and needs. Because resources are finite, individuals and societies must make choices about how to allocate them efficiently.
• Every choice has an associated cost—choosing one thing means giving up something else. This is why economists say “there’s no such thing as a free lunch.” Even free goods have an opportunity cost in terms of time or alternative use.
• Scarcity forces both individuals (microeconomics) and governments (macroeconomics) to prioritize decisions and develop systems for allocating resources, like markets or central planning.
• Scarcity applies not only to money but also to time, raw materials, and labor. It explains why all societies must answer the three basic economic questions: What to produce? How to produce? For whom to produce?
• Tip: A good way to remember scarcity is to think of it as “not enough to go around”—and that this condition is permanent, not just a temporary shortage.

Resources and Factors of Production

• Economists categorize scarce resources into four major types called the factors of production: land, labor, capital, and entrepreneurship.
• Land refers to all natural resources used in production, including minerals, forests, water, and land itself. Labor refers to human effort, both physical and mental, used in the production process.
• Capital in economics does not mean money; instead, it means physical capital like machines, tools, and buildings used to produce goods. Human capital refers to education, skills, and experience of workers.
• Entrepreneurship is the ability to combine land, labor, and capital to create goods and services. Entrepreneurs take risks and innovate to drive economic progress.
• Example: In a bakery, the oven is capital, the baker is labor, the flour and land are land, and the owner who organizes it all is the entrepreneur.

Opportunity Cost and the Production Possibilities Curve (PPC)

Opportunity Cost

• Opportunity cost is the value of the next best alternative that must be given up when a decision is made. It is not just the money spent, but what you sacrificed in terms of benefits or utility by choosing one option over another. This concept applies to individuals, businesses, and entire countries making economic decisions.
• For example, if a student spends an hour studying economics instead of working a $15/hr job, the opportunity cost is the $15 in lost wages. That sacrificed income is the best alternative they gave up in order to study. It's critical to understand that opportunity cost only considers the next best alternative—not all alternatives.
• In macroeconomics, opportunity cost explains why every production or consumption decision involves trade-offs. Because resources are scarce, choosing to produce more of one good means producing less of another. This trade-off is visually represented on the Production Possibilities Curve (PPC).
• Opportunity cost is not always monetary, it could be time, satisfaction, resources, or missed benefits. For example, a government deciding between building roads or funding healthcare must weigh the opportunity cost of whichever option it declines. Ignoring opportunity cost leads to inefficient choices and misallocation of resources.
• Tip: Always ask: “What did I give up to get this?” If the answer is unclear, you probably haven’t identified the true opportunity cost yet. Always focus on the next best alternative.

Trade-Offs and Efficiency

• Trade-offs occur because you can’t have everything as producing more of one good requires producing less of another. This is the foundation of all economic decisions and is graphically represented by the downward slope of the PPC. The curve forces us to confront choices and identify efficient combinations of production.
• Efficiency occurs when an economy is using all of its resources in a way that maximizes production. Any point on the PPC curve shows productive efficiency—meaning no resources are wasted. Producing inside the curve indicates inefficiency (unused resources), while producing outside the curve is impossible with current resources and technology.
• Trade-offs are also seen in government policy. For instance, increasing military spending means sacrificing civilian goods (often shown as “guns vs. butter” on the PPC). Understanding these trade-offs helps explain real-world policy debates and resource allocation problems.
• Economic growth and innovation can shift the PPC outward, allowing a society to make fewer trade-offs and achieve greater efficiency over time. This usually results from increased resources, better education, or improved technology.
• Example: If a factory shifts workers from making tables to making chairs, the trade-off is fewer tables. If workers are idle or machines are broken, then the factory operates inside the PPC and is inefficient.

Interpreting and Analyzing the PPC

• The Production Possibilities Curve (PPC) shows all the possible combinations of two goods that an economy can produce when all resources are fully and efficiently used. The curve demonstrates scarcity, trade-offs, opportunity cost, and efficiency in one diagram. Each point on the curve represents a specific allocation of resources between the two goods.
• Realistically, PPC curves are not straight lines and tend to be concave-shaped because certain resources are more compatible with the production of a specific good/service.
• The slope of the curve measures the opportunity cost of the good on the x-axis. The inverse of the slope measures the opportunity cost of the good on the y-axis.
• A bowed-outward PPC reflects increasing opportunity cost, meaning that as production of one good increases, more and more of the other good must be given up. This happens because not all resources are equally efficient at producing every good. For example, some workers are better at farming than making electronics, so reallocating them may lower efficiency.
• Points inside the PPC represent underutilization or inefficiency. This could be caused by unemployment, machine downtime, or poor resource management. A move from inside the curve to a point on the curve indicates better use of available resources.
• Points outside the PPC are unattainable with current resources and technology. However, these points may become possible in the future through economic growth, such as better education, new capital, or innovations that improve productivity.
• Visual Tip: Label your PPC with axes (Good A and Good B), include a few specific points, and be able to explain what happens when a point moves from inside to on to outside the curve. This shows your understanding of efficiency, growth, and scarcity.

Growth, Contraction, and the PPC

Economic Growth

• Economic growth is shown on the PPC as an **outward shift** of the curve. This means the economy can now produce more of both goods than before, increasing production possibilities and overall wealth. Growth results from improvements in technology, increases in resources, better education, or capital investment.
• Growth can be general (PPC shifts outward in all directions) or sector-specific (the curve bows outward more in one direction). For example, if a country invests heavily in healthcare tech, it may be able to produce more medical goods while other sectors remain unchanged.
• Long-term growth raises living standards, reduces scarcity, and creates room for more allocatively efficient outcomes. It also reduces the intensity of trade-offs by expanding total output possibilities.

Economic Contraction

• Contraction is shown as an **inward shift** of the PPC, meaning the economy has lost productive capacity. This can happen due to war, natural disasters, loss of capital, or labor force reductions. It reduces potential output and intensifies the scarcity problem.
• In the short term, a country may operate inside its PPC (inefficient) due to a recession or crisis. In contrast, a shift inward means the entire economy's capability has permanently shrunk. This makes it harder to meet people’s needs and limits future economic options.
• Understanding the difference between short-run inefficiency (inside PPC) and long-run contraction (inward shift) is crucial for interpreting economic scenarios accurately.

Comparative Advantage and Gains from Trade

Absolute vs. Comparative Advantage

• Absolute advantage refers to the ability of a producer (individual, firm, or country) to produce more of a good or service with the same amount of resources than another producer. For example, if Country A can make 20 tons of wheat and Country B can only make 10 tons using the same inputs, Country A has the absolute advantage in wheat production. However, having an absolute advantage does not necessarily mean that the producer should specialize in that good.
• Comparative advantage is more important in trade decisions and is based on opportunity cost. A producer has a comparative advantage in producing a good if they can produce it at a lower opportunity cost than another producer. This means giving up less of another good to produce it. Even if one country is better at producing everything (absolute advantage), it still benefits from trading based on comparative advantage.
• Understanding comparative advantage requires calculating the opportunity cost of one good in terms of another. For example, if Country A can produce either 10 cars or 5 computers, the opportunity cost of 1 car is 0.5 computers. To determine comparative advantage, compare the opportunity costs across producers and choose the one with the lower cost for each good.
• Comparative advantage explains why specialization and trade increase overall production and consumption possibilities for all parties involved. When each country specializes in what it produces most efficiently and trades, both can consume beyond their own production possibilities. This is represented graphically by shifting consumption outside the PPC.
• Tip: Don’t confuse absolute and comparative advantage. Absolute is about total output, while comparative is about opportunity cost. In AP questions, they will usually ask you to calculate opportunity cost using output or input tables, so pay attention to whether it's an output problem (goods per hour) or an input problem (hours per good).

Specialization and Terms of Trade

• Specialization means focusing resources on the production of a single good or service for which a producer has a comparative advantage. This increases overall efficiency and total output in the economy. When countries or individuals specialize and then trade, both parties can benefit by consuming more than they could without trade.
• Terms of trade refer to the rate at which one good is exchanged for another between two trading partners. For trade to be mutually beneficial, the terms of trade must fall between the two producers’ opportunity costs. If the exchange rate falls outside this range, at least one party would be worse off than if they had produced the good themselves.
• For example, if the opportunity cost of 1 computer is 2 shirts in Country A and 4 shirts in Country B, the terms of trade must fall between 2 and 4 shirts per computer. If the agreed trade is 1 computer for 3 shirts, both countries benefit because they receive the good at a lower opportunity cost than producing it domestically.
• Terms of trade are often simplified into ratios like 1:2 or 3:5. Make sure to match units correctly—always express the terms in “units of good A per unit of good B.” AP questions will often trick students who confuse the direction of the ratio or misread input vs. output tables.
• Pro Tip: You can always check if terms of trade benefit both sides by asking: “Am I getting the good at a lower opportunity cost than it costs me to make it myself?” If yes, then trade is beneficial. If not, then the terms of trade are not favorable.

Supply and Demand

Law of Demand and the Demand Curve

• The law of demand states that, all else held constant, when the price of a good rises, the quantity demanded falls, and when the price falls, the quantity demanded rises. This inverse relationship exists because of two key effects: the substitution effect and the income effect. The substitution effect means consumers will switch to cheaper alternatives when a good’s price increases, and the income effect means a price increase reduces real income, lowering purchasing power.
• The demand curve is downward-sloping from left to right, visually representing this inverse relationship between price and quantity demanded. Each point on the curve shows a different quantity consumers are willing and able to buy at a given price. A movement along the demand curve is caused only by a change in the good’s own price, not by other factors.
• A change in demand is different from a change in quantity demanded. A change in quantity demanded is movement along the curve due to price change, while a change in demand is a shift of the entire curve caused by something other than price. Understanding this difference is crucial when interpreting demand behavior.
• Demand schedules list the various quantities of a good consumers are willing to purchase at different prices. These can be shown in tables or graphed as a curve. Analyzing the slope and shape of the curve allows economists to estimate how sensitive consumers are to price changes.
• Example: If the price of coffee rises from \$3 to \$5, and people buy less coffee, that’s a movement along the demand curve. But if people suddenly switch to tea because they think coffee is unhealthy, the entire demand curve shifts left due to a change in taste.

Law of Supply and the Supply Curve

• The law of supply states that, all else held constant, when the price of a good increases, the quantity supplied also increases; when the price falls, the quantity supplied decreases. This direct relationship exists because higher prices create an incentive for producers to sell more of the good to increase profit. Lower prices reduce profitability, discouraging production.
• The supply curve is upward-sloping from left to right, showing this positive correlation between price and quantity supplied. Like demand, each point on the supply curve represents a quantity producers are willing and able to sell at a specific price. A movement along the supply curve is caused only by a change in the good’s price.
• A change in supply shifts the entire supply curve and is caused by factors other than the product’s price. These include input prices, number of sellers, technology, expectations of future prices, and government policies like taxes or subsidies. It’s important to distinguish between a shift (change in supply) and movement along the curve (change in quantity supplied).
• Supply schedules show the different quantities of a product that producers are willing to offer for sale at various prices. Like demand schedules, they can be graphed into a curve. Together, supply and demand curves determine market equilibrium.
• Example: If the price of strawberries rises, farmers will supply more strawberries—that’s a movement along the supply curve. But if a new harvesting machine makes strawberry farming cheaper, the supply curve shifts right, increasing supply at all prices.

Determinants (Shifters) of Demand and Supply

• Demand shifters include changes in income, consumer preferences (tastes), number of buyers, prices of related goods (substitutes and complements), and expectations of future prices. These shift the entire demand curve to the left or right. When demand increases, the curve shifts right; when demand decreases, it shifts left.
• Normal goods are those where demand rises with income (like new cars), while inferior goods are those where demand falls when income rises (like ramen noodles). Changes in income will shift demand for different goods in opposite directions based on whether they are normal or inferior. AP exams love to test this distinction.
• Supply shifters include changes in input prices, number of producers, technology, taxes/subsidies, and expectations about future market conditions. For example, a decrease in the price of raw materials shifts the supply curve right because it lowers production costs, making it more profitable to produce more at every price level.
• It’s crucial to distinguish between a change in quantity (movement along a curve due to price change) versus a change in demand or supply (a shift of the entire curve due to a non-price determinant). This distinction determines whether equilibrium moves along the same curve or resets entirely due to a new one.
• Tip: Memorize “TIMER” for demand shifters (Tastes, Income, Market size, Expectations, Related goods) and “RATNEST” for supply shifters (Resources, Alternative output prices, Technology, Number of sellers, Expectations, Subsidies, Taxes).

Determinants of Demand (INSECT)

I — Income: When consumer income rises, demand for normal goods increases and demand for inferior goods decreases. When income falls, the opposite happens. It’s important to identify whether a good is normal or inferior when analyzing demand shifts.

N — Number of Consumers: If the population of buyers increases, demand increases; if it decreases, demand falls. This applies to geographic shifts (e.g., more people move to a city) or demographic changes (e.g., aging population).

S — Substitutes and Complements: If the price of a substitute rises, demand for the original good increases. If the price of a complement rises, demand for the original good falls. Think: peanut butter and jelly vs. Coke and Pepsi.

E — Expectations: If consumers expect prices to rise in the future, current demand increases. If they expect prices to drop, they may delay purchases, reducing current demand.

C — Consumer Preferences (Tastes): Changing preferences due to trends, marketing, health information, or culture can shift demand. For example, rising concern about sugar might shift demand away from soda.

T — Taxes or Subsidies to Consumers: If the government subsidizes buyers or gives tax credits, demand increases. If it imposes consumption taxes (like a cigarette tax), demand tends to fall.

Demand Increases and Decreases

• An increase in demand means more of a good is desired at every price point. This shifts the entire demand curve to the right. The result is a higher equilibrium price and quantity, assuming supply stays constant.
• A decrease in demand means less of a good is desired at every price. The demand curve shifts to the left, leading to a lower equilibrium price and quantity. It’s not the same as a decrease in quantity demanded, which happens due to price changes along a fixed demand curve.
• Common errors include confusing movement along the curve with a shift. A price drop moves quantity demanded down the curve, but an income increase shifts the whole curve right. Always identify the cause before determining the effect.
• Example: If a major fitness trend increases the popularity of smoothies, demand for fruit rises. Even if fruit prices remain constant, more people will want to buy, so the curve shifts right and price/quantity rise.
• Graph interpretation is key. Be able to label the original and new demand curves, the change in equilibrium, and show how both price and quantity move in response to a shift.

In general:

Demand increases when:
I = increases
N = increases
S = increases
E = increases
C = decreases
T = increases

Demand decreases:
I = decreases
N = decreases
S = decreases
E = decreases
C = increases
T = decreases

Market Equilibrium, Disequilibrium, and Changes in Equilibrium

• Market equilibrium occurs where the quantity demanded equals the quantity supplied—this is the market-clearing price. At this price, there is no shortage or surplus, and the market is stable. Graphically, it’s where the demand and supply curves intersect.
• If the price is set too high, a surplus occurs—producers are willing to supply more than consumers want to buy. This excess supply puts downward pressure on prices until the market returns to equilibrium. If the price is too low, a shortage results, creating upward pressure as buyers compete for limited goods.
• When demand increases (shifts right), equilibrium price and quantity both increase. When demand decreases (shifts left), equilibrium price and quantity both fall. When supply increases (shifts right), price falls and quantity rises. When supply decreases, price rises and quantity falls. These predictable patterns are critical for graph analysis on the AP exam.
• If both supply and demand shift, the resulting change in equilibrium depends on the direction and magnitude of the shifts. For example, if demand increases and supply increases, quantity will rise, but price could rise, fall, or stay the same depending on which shift is larger. Understanding these scenarios requires diagram analysis and careful logic.
• Example: If a new video game system becomes popular (increase in demand) and simultaneously becomes cheaper to produce (increase in supply), the quantity sold will rise. The price may go up, down, or stay the same depending on which shift is greater. This is often tested using “double shift” questions.

Price Controls

Price Ceilings and Shortages

• A price ceiling is a legally established maximum price that sellers can charge for a good or service. Governments usually impose price ceilings to make essential goods more affordable during crises, such as rent controls or price caps on food. While the intention is to protect consumers, price ceilings often create unintended consequences.
• When a price ceiling is set below the equilibrium price, it leads to a shortage because the quantity demanded exceeds the quantity supplied. At the artificially low price, more consumers want to buy the good, but fewer producers are willing to supply it. This mismatch causes long lines, waiting lists, black markets, and deterioration in product quality.
• The price ceiling is only binding (effective) if it is set below the equilibrium price. If the ceiling is set above the equilibrium, it has no real effect—the market clears normally. AP questions often ask students to identify whether a price control is binding and to graphically analyze the resulting surplus or shortage.
• In the case of rent control, a binding ceiling might protect current tenants from rent increases, but it discourages new construction and reduces maintenance because landlords earn less profit. Over time, the housing shortage worsens. This is a real-world example of how well-meaning policy can create inefficient outcomes.
• Graph Tip: Draw the supply and demand curves, find equilibrium, and then draw a horizontal line below equilibrium for a binding ceiling. Shade the area of the shortage (where Qd > Qs), and label all axes and points clearly.

Price Floors and Surpluses

• A price floor is a legally established minimum price that sellers must charge for a good or service. Governments typically implement price floors to protect producers’ incomes, especially in markets like agriculture or labor. Common examples include minimum wage laws and agricultural price supports.
• When a price floor is set above the equilibrium price, it leads to a surplus because the quantity supplied exceeds the quantity demanded. At the artificially high price, producers are willing to supply more, but fewer consumers are willing to buy. This results in wasted goods, storage costs, or government purchases of surplus inventory.
• Price floors are only binding if set above the market equilibrium price. If set below equilibrium, they are non-binding and do not affect the market. Recognizing the difference between binding and non-binding controls is essential for understanding real-world consequences and for answering exam questions.
• Minimum wage laws, a form of price floor in the labor market, can protect workers by guaranteeing a wage floor. However, if the minimum wage is set too high above equilibrium, it can cause a surplus of labor, also known as unemployment, because firms hire fewer workers at the higher cost.
• Example: If the equilibrium wage is \$10/hour and the government imposes a minimum wage of \$15/hour, more people will want to work, but employers will demand fewer workers. This creates a surplus of labor, which economists identify as unemployment caused by the binding price floor.

Efficiency and the Production Possibilities Curve (PPC)

Productive Efficiency

• Productive efficiency means producing goods and services using all available resources in the least wasteful way. On a PPC graph, this means any point on the curve. It shows that the economy is getting the maximum output possible with current resources and technology, without idle labor or capital.
• Any point inside the PPC represents productive inefficiency—resources are not fully used. This could be due to unemployment, machine breakdowns, or other types of underutilization. The farther inside the curve, the more inefficient the economy is.
• Productive efficiency focuses only on maximizing quantity, not on whether society values what is being produced. For example, producing millions of military tanks may be productively efficient, but it might not reflect consumer needs.

Allocative Efficiency

• Allocative efficiency occurs when the combination of goods produced matches consumer preferences—what society actually wants. On a PPC, this is a specific point on the curve, not just anywhere on it. That point represents the mix of goods that maximizes societal satisfaction.
• It is possible to be productively efficient but allocatively inefficient. For example, if an economy produces only luxury yachts but most people need affordable food, it's not allocatively efficient. The goal is not just maximum output, but the right kind of output.
• Markets tend to move toward allocative efficiency through prices. When prices reflect consumer preferences, producers are incentivized to make more of what people demand, shifting resources to match needs.

Optimal Efficiency

• Optimal efficiency exists when an economy is both productively and allocatively efficient. All resources are fully used, and the output mix aligns with societal wants. It is the theoretical “best” state an economy can reach.
• Graphically, this is a specific point **on the PPC** that aligns with the socially desirable combination of goods and services. Reaching this point requires not only full employment, but also clear information about preferences and effective price signals.
• Policies like subsidies, taxes, or government regulation may aim to push an economy toward optimal efficiency, especially when markets fail to do so on their own.

Market Efficiency and Deadweight Loss

Consumer and Producer Surplus

• Consumer surplus is the difference between the maximum price a buyer is willing to pay and the actual price they pay. It represents the extra benefit or utility consumers receive from buying a product for less than they were prepared to spend. Graphically, consumer surplus is the area below the demand curve and above the market price, up to the quantity exchanged.
• Producer surplus is the difference between the price a seller receives for a good and the minimum price they were willing to accept. It reflects the additional benefit producers gain when selling at a market price higher than their cost of production. On a graph, it is the area above the supply curve and below the market price, up to the quantity sold.
• Total economic surplus is the sum of consumer surplus and producer surplus. It is maximized at the market equilibrium where the quantity demanded equals the quantity supplied. This is why economists say competitive markets are efficient, because they allocate resources to those who value them most and do so at the lowest cost.
• Any policy or distortion that moves the market away from equilibrium, such as price floors, price ceilings, or taxes, reduces total surplus and leads to inefficiency. This reduction in total surplus is a key concept in understanding why economists often oppose unnecessary market intervention.
• Example: If you were willing to pay \$30 for a concert ticket but got it for \$20, your consumer surplus is \$10. If the seller’s cost was only \$5, their producer surplus is \$15. Together, the transaction created \$25 in total surplus, which would be reduced if the government intervened and forced a higher or lower price.

Deadweight Loss and Inefficiency

• Deadweight loss is the loss of total surplus (consumer + producer surplus) that occurs when a market is not operating at efficient equilibrium. It represents the value of trades that do not happen due to price controls, taxes, subsidies, or monopolies. These missed trades mean mutually beneficial exchanges are prevented, reducing overall welfare in the economy.
• Graphically, deadweight loss appears as a triangle between the supply and demand curves, cut off by a quantity that is either too low (underproduction) or too high (overproduction). The size of the triangle depends on how much quantity deviates from equilibrium. The greater the distortion, the larger the deadweight loss.
• Price ceilings (like rent control) cause shortages and deadweight loss by preventing high-value buyers from obtaining the product. Price floors (like minimum wage) cause surpluses and deadweight loss by pricing out willing buyers or employers. In both cases, trades that would have benefited both sides are lost.
• Taxes also create deadweight loss by raising the price buyers pay and lowering the price sellers receive. This wedge reduces the quantity exchanged, shrinking both consumer and producer surplus. Governments often tolerate this inefficiency in order to collect revenue, but the economic cost is the deadweight loss.
• Tip: To identify deadweight loss on a graph, find the triangle that forms between the supply and demand curves at the restricted quantity. Make sure to label all areas: consumer surplus, producer surplus, government revenue (if there's a tax), and deadweight loss. This is heavily tested on the AP exam.

Common Misconceptions

Misunderstanding Opportunity Cost

• Students often confuse opportunity cost with total cost or monetary cost. Opportunity cost refers to the **next best alternative** that is given up—not everything that could be given up. On the AP exam, when presented with a trade-off scenario, only consider the most valuable alternative that was not chosen.

Confusing Shifts vs. Movements Along Curves

• Many students incorrectly think that a change in price causes a shift of the demand or supply curve. In fact, a price change only causes movement along the existing curve. Only non-price determinants (like income, technology, or expectations) cause the entire curve to shift left or right.

Mixing Up Comparative and Absolute Advantage

• Students often assume the person or country with the highest total output should specialize. However, comparative advantage is based on **lower opportunity cost**, not who is better at everything. Even a country with an absolute advantage in both goods should still specialize based on opportunity cost differences.

Misreading Price Controls

• Students frequently misidentify whether a price control is binding. A price ceiling must be **below** equilibrium to cause a shortage, and a price floor must be **above** equilibrium to create a surplus. Always draw a graph to verify this—AP questions are designed to confuse you without one.

Forgetting Deadweight Loss Appears with All Inefficiencies

• Deadweight loss is not limited to taxes—it also arises with price ceilings, price floors, monopolies, and subsidies. Any time the quantity exchanged moves away from equilibrium, there is a loss of total surplus. Be ready to shade the triangle between supply and demand curves on the graph.

Practice Problems: Basic Economic Concepts

Problem 1: Comparative Advantage and Specialization

Question: Country A can produce 10 tons of rice or 5 tons of corn with the same resources. Country B can produce 6 tons of rice or 6 tons of corn. Which country has the comparative advantage in corn, and should they specialize?

Solution:
Step 1: First, calculate opportunity cost for each: - Country A: 1 corn = 2 rice (10 ÷ 5) - Country B: 1 corn = 1 rice (6 ÷ 6)

Step 2: Since Country B gives up less rice to produce corn, it has the comparative advantage in corn.

Step 3: Therefore, Country B should specialize in corn, and Country A should specialize in rice. They can then trade to consume beyond their PPCs.

Problem 2: Price Ceilings and Market Effects

Question: In the market for rental apartments, the equilibrium monthly rent is $1,500. The government passes a law imposing a price ceiling of \$1,000 per month on all apartments. Based on this price control, what will happen in the market for apartments? Describe the effects on quantity demanded, quantity supplied, and total surplus.

Solution:
Step 1: A price ceiling set below equilibrium is binding, meaning it will change how the market functions.

Step 2: At the artificially low price of $1,000, quantity demanded increases because more people want to rent at a cheaper price.

Step 3: At the same time, quantity supplied decreases because landlords earn less profit and some may exit the market.

Step 4: This creates a shortage, where the number of apartments demanded exceeds the number available.

Step 5: Total economic surplus decreases because apartments that would’ve been rented at equilibrium are no longer rented, leading to a deadweight loss.

Step 6: In the long run, the quality of rental housing may decline and black markets may develop, both of which further reduce efficiency and fairness in the market.