Chapter 6 Flashcards
(17 cards)
Price Controls
Attempt to set prices through government involvement in the market.
Price Ceiling
Creates a legally established maximum price for a good or service.
Black Markets
illegal Markets that arise when price controls are in place.
Non Binding Price Ceiling
When the price ceiling is set above the market equilibrium price, the price ceiling does not influence the market.
Biding Price Ceiling
When the price ceiling is set below the market price, it creates a binding constraint that prevents supply and demand from clearing the market.
What is the short term results of a binding price ceiling?
A black market developed to eliminate the shortage caused by the price ceiling, but the quantity supplied is smaller and the price is higher. Which means consumers are overall worse off than before.
What are the long run effects of a binding price ceiling.
The product becomes harder to find as producers switch to making other goods. Consumers adjust and want more bread, but cannot find it so they switch to other similar goods that are not price controlled.
What happens to black market prices in the long run?
Price rise as consumers demand more bread and less producers make bread for lower prices. As consumers switch to substitutes black market will decrease.
Rent Control
A price ceiling that applies to the market for apartment rentals.
What are the unintended consequences of rent control?
Apartments become harder to find and lead to more dangerous living conditions.
Price Gouging Laws
Place a temporary price ceiling on prices that sellers can charge during emergencies. Creates a shortage when the need for a certain good is greatest.
Price Floor
Legally established minimum price for a good or service.
What are the unintended effects of a price floor?
Producers make more milk at a higher price than consumers are willing to buy, leading to milk going to waste.
How can the government respond to waste created by a price floor?
1) By restricting the supply. 2) By stimulating demand(good luck)
What happens when binding price floors remain in place for long periods of time?
Supply and demand become more elastic. Creates a larger surplus. Black market develops to eliminate the glut of milk.
Minimum Wage
The lowest hourly wage rate that firms may legally pay their workers.
What are the shorterm effects of minimum wage laws?
Increase in unemployment.
