CHAPTER 6 Flashcards by Bella V

Price Ceiling/Cap

government regulation that makes it illegal to charge a higher price than a specified level
e.g. rent can be set at a maximum price of $1000 a month & mustn’t exceed that amount

How well did you know this?

Not at all

Perfectly

What happens when a price cap is imposed below or above the equilibrium?

Above - no effect; doesn’t constrain market forces; law & market aren’t in conflict

Below - powerful effect; cap attempts to prevent the price from regulating quantities demand & supplied; law & markets in conflict

How well did you know this?

Not at all

Perfectly

What is a rent ceiling?

price cap applied to housing market

How well did you know this?

Not at all

Perfectly

A rent ceiling below the equilibrium creates….

Housing shortages
Increased Search Activity
Illicit Market

How well did you know this?

Not at all

Perfectly

Why do housing shortages occur w/ a rent ceiling below the equilibrium?

At equilibrium level - quantity of housing supplied = the quantity of housing demand (NO SHORTAGE OR SURPLUS)
Below level - quantity of housing demanded > the quantity of housing supplied (SHORTAGE)
Therefore, the quantity available is what is supplied & must be allocated

How well did you know this?

Not at all

Perfectly

Why does a rent ceiling below the equilibrium increase search activity?

Search activity - time spent looking for someone w/ whom to do business
Shortage increases search activity
why? Opportunity cost of housing = to the rent + time & other resources spend searching for limited quantity available
Cost of increased search activity might end up making the full cost of housing higher

How well did you know this?

Not at all

Perfectly

Why does a rent ceiling below the equilibrium create illicit markets?

Rent ceiling encourages illegal trading - equilibrium price exceeds price ceiling

frustrated renters & landlords constantly seek ways of increasing rent

Level of illicit market rent depends on how tightly the rent ceiling is enforced

Loose enforcement - illicit market rent is close to unregulated rent
□ Strict enforcement - illicit market rent is equal to the maximum price that a renter is willing to pay

How well did you know this?

Not at all

Perfectly

When rent ceiling is set below the equilibrium rent, it results in….

inefficient underproduction of housing
deadweight loss - marginal social benefit exceeds marginal social cost; quantity of housing supplied is less than efficient quantity
consumer & producer surplus shrinkage

How well did you know this?

Not at all

Perfectly

According to the Fair-Rules View, is rent ceiling fair?

no, anything that blocks voluntary exchange is unfair

How well did you know this?

Not at all

Perfectly

According to the Fair-Results View, are rent ceilings fair?

fairest outcome is one that allocates scarce housing to the poorest
market must ration smaller quantity & allocate it amongst those who demand it
3 main allocation methods: lottery, first-come, first-served, & discrimination

How well did you know this?

Not at all

Perfectly

When the wage rate is low, the quantity of labour demanded (by firms) is ____. Why?

high
why? lower costs of production, firms can hire more employees & determine how much labour is in demand

How well did you know this?

Not at all

Perfectly

When the wage rate is high, the quantity of labour supplied (By households) is ____. Why?

high
Why? Households decide how much labour to supply; higher wage = better income & increase in the opportunity cost for leisure

How well did you know this?

Not at all

Perfectly

What is a price floor? what occurs if a price floor is set above or below the equilibrium?

Price Floor - government regulation that makes it illegal to charge a price lower than a specified level

○ Below equilibrium - no effect; price floor doesn’t constrain market forces
○ Above - impactful; price floor attempts to prevent price from regulating the quantities demanded & supplied

How well did you know this?

Not at all

Perfectly

What is minimum wage?

price floor that is a applied to a labour market

How well did you know this?

Not at all

Perfectly

what occurs when the wage rate is at the equilibrium level?

the quantity of labour supplied = the quantity of labour demanded
neither a shortage nor surplus

How well did you know this?

Not at all

Perfectly

What occurs when the wage rate is ABOVE the equilibrium level?

the quantity of labour supplied exceeds the quantity of labour demanded
surplus of labour
creates unemployment - higher cost of production for firms (lay-off employees)

How well did you know this?

Not at all

Perfectly

According to the Fair-Results view, is minimum wage fair?

No, because only those who have jobs & keep them benefit from minimum wage
Those who search & find jobs end up worse off because of the increased cost of job search they incur
unemployed worse off
doesn’t properly allocate labour (often discrimination used)

How well did you know this?

Not at all

Perfectly

According to the fair-rules view, is minimum wage fair?

no, blocks voluntary exchange
Firms willing to hire more labour & people willing to work more; Law prevents that to do so
usually a cap

How well did you know this?

Not at all

Perfectly

What does a labour market supply curve measure?

measures the workers marginal social cost of supplying labour
Cost = workers leisure forgone

How well did you know this?

Not at all

Perfectly

What is does the labour market demand curve measure?

measures the firms marginal social benefit of using labour
Benefit is the value of goods & services produced

How well did you know this?

Not at all

Perfectly

What are the two prices of a tax transaction? Which price do buyers respond to? Which price do sellers respond to?

(1) price that includes the tax - Buyers respond to price
(2) the price that excludes the tax - Sellers respond to price

What is tax incidence?

division of the burden of a tax between buyers & sellers
When the government imposes a tax of the sale of a good, buyer price might rise by full amount of tax, lesser amount, or not at all

When the government imposes a tax of the sale of a good, buyer price might rise by full amount of tax, lesser amount, or not at all. Who does the burden fall upon in each scenario?

(1) If buyer price rises by full amount, burden falls entirely on the buyers (buyer pays tax)

(2)If buyer price rises by a lesser amount, burden falls partly on buyers & sellers

(3)If buyer price doesn’t change, burden falls on sellers

What does tax on sellers infer?

rise in their cost
decrease in supply

what does a tax on buyers infer?

lowers the amount they are willing to pay sellers decreases demand

Tax drives a _____ between the price buyers pay & the price sellers receive. What does it result in?

1. wedge 2. inefficient underproduction

Tax makes marginal benefit _____ marginal cost. What occurs as a result?

1. exceed 2. shrinks producer & consumer surplus; creates deadweight loss

Described the relationship of tax incidence & the elasticity of demand.

* Perfectly inelastic demand - buyers pay entire tax ○ If equilibrium quantity stays the same, no underproduction or deadweight loss from tax * Perfectly elastic demand - sellers pay the entire tax ○ Deadweight loss arises when demand is not perfectly inelastic & largest when demand is perfectly elastic The more inelastic the demand, the larger the amount of tax paid by buyers

Described the relationship of tax incidence & the elasticity of supply

* Perfectly inelastic supply - sellers pay ○ If equilibrium quantity stays the same, no underproduction or deadweight loss from tax * Perfectly elastic supply - buyers pay ○ If equilibrium quantity decreases, underproduction & deadweight loss arises ○ Deadweight loss arises from a tax when supply is not perfectly inelastic & largest when supply is perfectly elastic More elastic the supply, the larger the amount of tax paid by buyers

what are the 2 economic principles of fairness that are applied to the tax system?

a. Benefits principle - people should pay taxes equal to the benefits they receive from the services provided by the government § Fair arrangement because those who benefit the most, pay the most taxes b. Ability-to-pay principle - people should pay taxes according to how easily they can bear the burden of the tax § Rich person can bear more burden than poor person § Reinforces the benefits principle to justify high rates of income tax on high incomes

What is a product quota & how is it used by governments for market intervention?

Production Quota - upper limit to the quantity of a good that may be produced in a specified period (e.g. Milk)

If production quota is above equilibrium quantity, what changes will occur?

no change would occur bc dairy farmers are already producing less than the quota

If production quota is set below the equilibrium quantity, what 5 major changes occurs?

1. Decrease in supply - farmer assigned production limit that is less than the amount they would normally produce & supply w/o the quota § Quantity supplied become the amount permitted by the quota & quantity is fixed § Supply become perfectly inelastic 2. Rise in price - market forces free to determine the price § Quota decreases supply, rising price 3.Decrease in marginal cost - farmers produce less & stop using resources w/ highest marginal cost 4. Inefficiency - underproduction § Marginal social benefit at the quantity produced is equal to the increased market price § Marginal benefit exceeds cost & deadweight loss arises 5. Incentive to cheat & overproduce - price exceed marginal cost & farmers can make larger profit by producing one more unit

what is the purpose of a subsidy?

payment made by government to producer Similar effects to tax

What 5 effects do subsidies have on the producer?

1. Increase is supply - subsidy is like a negative tax; equivalent to a decrease in cost & increase in supply 2. Fall in price & increase in quantity produced 3. Increase in marginal cost - lowers price paid by consumers but increases marginal cost of growing grain § Cost increases because farmers grow more, must use less ideal resources for growing 4. Payment by government to farmers 5. Inefficient overproduction - at quantity produced w/ subsidy, marginal social benefit = fallen market price § Marginal social cost increased & exceeds market prices - increased production creates inefficiency

Describe the market for illegal goods.

* The lower the price of the drug, the larger the quantity of the drug demanded * The lower the price of the drug, the smaller the quantity supplied * When a good is illegal, cost of trading the good increases * The larger the penalty & better the policing, the higher the cost * Penalties on sellers & buyers decrease supply

Which of the following is an example of a price ceiling or price cap? A. Walmart promises to have the lowest prices. B. A regulation sets the minimum price of ethanol at 50 cents per litre. C. A regulation requires cable service to be provided for no more than $30 a month. D. Costco sells organic milk at $4 per litre.

C why? price cap - government regulation that makes it illegal to charge a higher price than a specified level In this scenario, a minimum price is set on cable & cant exceed monthly value

Which of the following statements best describes search activity? A. Ron thinks Google is a better search engine than Yahoo! B. Scarce housing resources should be allocated to the poorest. C. Tim spends time looking for jobs and sending applications to firms. D. Wage floors result in higher unemployment.

C Search activity - time spent looking for someone w/ whom to do business

Which of the following is an example of a black market transaction? Annie rents an apartment _____. A. at the rent ceiling after many months of search B. at the equilibrium rent C. in a rent-controlled city at the rent ceiling D. in a rent-controlled city by paying $1,000 for an extra set of keys

D Black Market transaction = illegal

How are scarce housing resources allocated when a rent ceiling is in place? With an effective rent ceiling, housing is allocated by ______. Search activity ______. A. a method other than by price; increases and black markets can arise B. a method other than by price; decreases and black markets are eliminated C. willingness to pay; increases and black markets can arise D. willingness to pay; decreases and black markets are eliminated

Why does a rent ceiling create an inefficient and unfair outcome in the housing market? An effective rent ceiling creates an inefficient outcome because at the rent ceiling ______. A. marginal social cost is maximized B. marginal social cost exceeds marginal social benefit C. marginal social benefit exceeds marginal social cost D. marginal social benefit equals zero An effective rent ceiling creates an unfair outcome because _______. A. landlords who cannot cover their costs rent sub-standard units B. search activity increases C. a black market arises D. the rent ceiling does not necessarily allocate housing to the less well off

1. C 2. D

Rising Fertilizer Prices Prospects for the fertilizer sector are exceptional this year. Grain prices have sky rocketed, stimulating greater plantings of grain and greater demand for fertilizer. The price of fertilizer has soared from US$350 to more than US$600 per tonne during the past year. Suppose that the government tries to halt the fertilizer price rise and sets a price ceiling below the equilibrium price. How would the price ceiling influence the quantity of fertilizer supplied and the quantity demanded? If initially the market is in equilibrium, then the price ceiling ______ the quantity of fertilizer supplied and ______ the quantity of fertilizer demanded. A. increases; decreases B. decreases; decreases C. decreases; increases D. increases; increases

With a price ceiling on fertilizer set below the equilibrium price, total surplus _______ and deadweight loss _______. A. increases; increases B. increases; decreases C. decreases; increases D. decreases; decreases

Which of the following is an example of a price floor? A. The government guarantees that potato farmers will receive at least $50 a tonne. B. Superstore charges $1 more than Metro charges for a 5 kilogram bag of sugar. C. Stock prices hit a floor last week. D. The lowest price of gasoline this year was $0.75 per litre. When a _____ is applied to a labour market, it is called a minimum wage. A. price ceiling B. price floor C. subsidy D. production quota

1. A 2. B

What are the effects of a minimum wage set below the equilibrium wage? A minimum wage set below the equilibrium wage _______. A. lowers the wage rate and creates a labour surplus B. has no effect on the equilibrium wage rate or the quantity of labour employed C. lowers the wage rate and creates a labour shortage D. has no effect on the equilibrium wage rate but it creates a black market for labour

Explain how scarce jobs are allocated when a minimum wage is in place. When a minimum wage is in place, scarce jobs are allocated by _______. A. a method other than market price, such as personal characteristics, first-come first-served, or discrimination B. the method that maximizes workers' surplus C. the method that eliminates deadweight loss D. the method that maximizes total surplus

How does the elasticity of demand influence the incidence of a tax, the tax revenue, and the deadweight loss? The greater the elasticity of demand, the _______ is the amount of the tax paid by sellers and the _______ is the decrease in the equilibrium quantity. A. smaller; smaller B. smaller; greater C. greater; greater D. greater; smaller The greater the elasticity of demand, the _______ the tax revenue and the _______ is the deadweight loss. A. smaller; greater B. greater; smaller C. smaller; smaller D. greater; greater

1. C 2. A

How does the elasticity of supply influence the incidence of a tax, the quantity bought, the tax revenue, and the deadweight loss? The greater the elasticity of supply, the ______ is the amount of the tax paid by sellers and the ______ the decrease in the quantity bought. A. smaller; smaller B. greater; greater C. greater; smaller D. smaller; greater The greater the elasticity of supply, the _______ the tax revenue and the _______ is the deadweight loss. A. smaller; smaller B. greater; smaller C. smaller; greater D. greater; greater

1. D 2. C

Why is a tax inefficient? A tax is inefficient because _______. A. with a tax, the market produces more than the equilibrium quantity B. it decreases consumer surplus but increases producer surplus C. the burden of the tax is not always split equally between buyers and sellers D. the marginal social benefit of the last unit sold exceeds the marginal social cost of the last unit produced and a deadweight loss is created

When would a tax be efficient? A tax is efficient when supply is perfectly _______ or demand is perfectly _______. A. elastic; inelastic B. inelastic; inelastic C. elastic; elastic D. inelastic; elastic