question archive How does elasticity of supply affect the loss of economic surplus caused by a price ceiling?
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How does elasticity of supply affect the loss of economic surplus caused by a price ceiling?
Economic surplus equals consumer surplus plus producer surplus. In other words, it represents an additional opportunity in pricing. However, when the government or industry enforces a price ceiling, it also places a limit on both consumer surplus and producer surplus, which lowers economic surplus. The extent to which it lowers economic surplus is driven by elasticity of supply.
Elasticity of supply measures the sensitivity of quantity supplied to changes in price. If elasticity or sensitivity is high, the price ceiling isn't that big of deal because quantity supplied is going to drop as soon as prices increase. However, if elasticity is low, it means some customers are willing to pay a lot more than other customers for the same product so the loss of economic surplus is higher due to the price ceiling.