Chapter 5 Flashcards
Why do price controls generally fail?
They disrupt the normal functioning of the market.
What are price controls?
An attempt to set prices through government involvement in the market.
What are price ceilings?
Legally established maximum prices for goods or services.
What does the law of supply and demand tell us will happen if a price drops? Why is this bad when it’s a result of a price control?
The quantity consumers demands will increase.
- the quantity supplied will fall because producers will be receiving lower profits for their efforts.
- the consumers demand more of the item than what is available at the legal price
What are black markets?
Illegal markets that arise when price controls are in place.
Bread example:
What will happen to the quantity of bread for sale if there is a low price control is put on it?
Consumers will want to buy more since the price is lower, but producers will manufacture less - which leads to a shortage of bread.
Bread example:
What will happen to the typical size of a loaf for sale if there is a low price control is put on it?
Manufacturers will try to maintain profits by reducing the size of loaves.
Bread example:
What will happen to the quality of the bread if there is a low price control is put on it?
Producers will likely use cheaper ingredients and many expensive brands will no longer be profitable. The quality of available bread will decline.
Bread example:
What will happen to the opportunity cost of finding bread if there is a low price control is put on it?
The opportunity cost will rise. Consumers will spend significant resources going from store to store to see if a bread shipment has arrived.
Bread example:
Will people have to break the law to buy bread if there is a low price control is put on it?
Since bread will be hard to find, but people will still need it, black markets will develop.
What is a nonbinding price ceiling?
When a price ceiling is above the equilibrium/market price.
What is a binding price ceiling?
When a price ceiling is below the equilibrium/market price.
What is the long term effect of a binding price ceiling?
Increased elasticity on the part of both producers and consumers makes the shortage larger than it was in the short run.
What is rent control?
A price ceiling that applies to the housing market - a local government caps the prices of apartment rentals to keep housing more affordable.
What are price gouging laws?
Placing a temporary ceiling on the prices that sellers can charge during times of emergency until markets function normally again.
