Chapter 5: Price Controls and Market Efficiency Flashcards
What happens if a price is set above equilibrium?
Sellers will be unable to find buyers (excess supply)
Q demanded is less than Q supplied
What happens if a price is set below equilibrium?
Buyers will be unable to find sellers (excess demand)
Q supplied is less than Q demanded
What determines the quantity with administered prices, between quantity demanded or supplied?
Whichever is lesser
What is a price floor?
A price control that makes in illegal to sell a product below a certain price
Typically leads to excess supply as it pushes the price above Equilibium
In the supply/demand of LABOR, what is the effect of a minimum wage?
Effectively a price floor, causes excess supply of labor with not enough demand –> leads to unemployment
What is a price ceiling?
A maximum allowed selling price
Typically leads to excess demand as it pushes price below equilibrium
What is a consequence of price ceilings?
A first come first served market
Typically gives rise to a black market
What is a black market?
A situation when products are sold at prices that violate a legal price control
Profit can be made by buying at the legal price, and selling at the (illegal) black-market price
What are binding rent controls?
A specific form of price ceiling
Leads to a shortage of housing because Q demanded exceeds Q supplied
Black market housing arises, illegal schemes like “key money”
What is the price corresponding to a specific Q demanded?
The highest price consumers are willing to pay
represented by the height of a demand curve at a given Q
What is the price corresponding to a specific Q supplied?
The lowest price producers are willing to accept
represented by the height of the supply curve at a given Q
What is Consumer vs Producer surplus? How is it calculated (In total and at a given Q)?
The price above (consumers) or below (producers) the equilibrium
In general, it is the area above (consumers) or below (producers) the equilibrium
For a given Q, it is the price difference between Equilibrium and Consumer price or Producer price
How do you calculate total economic surplus?
Consumer Surplus + Producer Surplus = Total Economic Surplus
When is economic surplus maximized?
At the competitive equilibrium level of output (“the market is efficient”)
What is deadweight loss?
The loss of market efficiency due to price ceilings/floors or output quotas
