Principles of Economics chapter 4 Flashcards
What are price controls, price ceilings and price floors
Price controls are legal restrictions on how high or low a market price may go. They can take two forms: a price ceiling, a maximum price sellers are allowed to charge for a
good or service, or a price floor, a minimum price buyers are required to pay for a good or service.
Price ceilings often lead to inefficiency in the form of inefficient allocation to consumers, explain this
Some people who want the good badly and are willing to pay a high price don’t get it, and some who care relatively little about the good and are only willing to pay a low price do get it.
What are wasted resources
Price ceilings typically lead to inefficiency in the form of wasted resources: people expend money, effort, and time to cope with the shortages caused by the price ceiling.
Price ceilings often lead to inefficiency in that the goods being offered are of inefficiently low quality, explain this
Sellers offer low-quality goods at a low price even though
buyers would prefer a higher quality at a higher price.
What is a black market
A black market is a market in which goods or services are bought and sold illegally — either because it is illegal to sell them at all or because the prices charged are legally
prohibited by a price ceiling.
What is the minnimum wage
The minimum wage is a legal floor on the wage rate, which is the market price of labor.
A price floor creates inefficiency in at least four ways:
- It causes inefficiently low quantity.
- It leads to an inefficient allocation of sales among sellers.
- It leads to a waste of resources.
- It leads to sellers providing an inefficiently high-quality level.
Rent control, like all price ceilings, creates inefficiency in at least four distinct ways, what are these
- It reduces the quantity of apartments rented below the efficient level.
- It typically leads to inefficient allocation of apartments among would-be renters.
- It leads to wasted time and effort as people search for
apartments. - It leads landlords to maintain apartments in inefficiently low quality or condition.
How can price floors lead to inefficient allocation of sales among sellers
Sellers who are willing to sell at the lowest price are unable to make sales while sales go to sellers who are only willing to sell at a higher price.
Price floors often lead to inefficiency in that goods of inefficiently high quality are offered, explain this
Sellers offer high-quality goods at a high price, even though buyers would prefer a lower quality at a lower price.
What are quantity control, quota and a quota limit
A quantity control, or quota, is an upper limit on the quantity of some good that can be bought or sold. The total amount of the good that can be legally transacted is the quota limit.
What does a license give someone
A license gives its owner the right to supply a good.
What is the demand price
The demand price of a given quantity is the price at which consumers will demand that quantity.
What is a supply price
The supply price of a given quantity is the price at which producers will supply that quantity.
What is meant by a wedge
A quantity control, or quota, drives a wedge between the demand price and the supply price of a good; that is, the price paid by buyers ends up being higher than that received
by sellers.
