Ch. 5 Price Cielings & Floors Flashcards
1
Q
What is a price ceiling?
A
A max. price allowed by law
2
Q
What causes price ceilings? (5)
A
- shortages
- reductions in product quality
- wasteful lines & other search costs
- a loss in gains from trade
- a misallocation of resources
3
Q
What is a shortage?
A
When the price ceiling is below market price (quantity demanded is greater than quantity supplied)
4
Q
What is one way to evade price controls?
A
Lower quality or reduce service
5
Q
What is deadweight loss?
A
total of lost consumer and producer surplus when not all mutually profitable gains from trade are exploited
6
Q
What causes deadweight loss?
A
Price Ceilings
7
Q
What is a price floor? & an example
A
A min. price allowed by law ex. minimum wage
8
Q
What are 4 causes of a price floor?
A
- surpluses
- lost gains from trade (DWL)
- wasteful increases in quality
- a missalocation of resources
