chapter 5 Flashcards
(28 cards)
general-equilibrium analysis
the analysis of all the economy’s markets simultaneously, recognizing the interactions among the various markets
partial-equilibrium analysis
the analysis of a single market in isolation, ignoring any feedbacks that may come from induced changes in the other markets
price floor
minimum permissible price that can be charged for a particular good or service
when is a price floor binding?
when the price floor is set above the equilibrium; leads to excess supply
price ceiling
maximum price at which certain goods and services may be exchanged
when is a price ceiling binding?
when the price ceiling is set below the free-market equilibrium price; leads to excess demand
how do sellers allocate products in excess demand?
first-come, first-served basis
sellers’ preferences
allocation of commodities in excess demand by decisions of the sellers
black market
goods are sold at prices that violate a legal price control
why do price ceilings create the potential for a black market?
profit can be made by buying at the controlled price and selling at the black-market price
why would governments impose price ceilings?
- restrict production
- keep specific prices down
- to satisfy notions of equity in the consumption of a product that is temporarily in short supply
binding rent controls are a specific case of price (floors/ceilings)
ceilings
what are some effects of binding rent controls?
- there will be a shortage of rental housing
- alternative allocations schemes (seller’s preference) or gov’t intervention (security-of-tenure laws)
- appearance of black markets (requiring key money” payment from new tenants)
who benefits from rent controls?
existing tenants - as the gap between the controlled and free-market rents grows, and as the stock of available housing falls, those lucky enough to stay put benefit
who loses from rent controls?
- landlords - they don’t get the rate of return the expected on investments
- potential future tenants - will have to go to further extremes to yoink that housing
describe short-run supply of rent-controlled housing accomodations
inelastic; quantity of apartments does not change much
describe the long-run supply of rent-controlled housing accomodations
elastic; low incentive to renovate/build new housing bc poor return on investment; housing shortage worsens over time
in a market efficiency demand curve, for each unit of a product, the price on the market shows the value __________________
to consumers from consuming that unit
in a market efficiency supply curve, for each unit of a product, the price on the on the market shows __________________
the lowest acceptable price to firms for selling a unit; reflects the additional cost to firms from producing that unit
economic surplus
difference between value to consumers and additional costs to firms (below demand curve and above the supply curve); represents the net value that society as a whole receives by producing and consuming the product
what kind of market will maximize economic surplus?
competitive; it is efficient when price is free to achieve its market-clearing level
what leads to market inefficiency in a free and competitive market?
imposition of a binding price ceiling/floor
what’s an output quota?
a goal for the production of a good; usually set by gov’t or organization
- can encourage high levels of production
- can restrict production
when is partial-equilibrium analysis appropriate?
when the market being examined is small relative to the entire economy
