Chapter 6 - Supply, Demand, and Government Policies Flashcards
(27 cards)
What is the legal maximum on the price at which a good can be sold?
The price ceiling
What is the legal minimum on the price at which a good can be sold?
The price floor
What is an example of price ceiling?
Rent control
What is an example of price flooring?
Minimum wage
True or False:
When the market price hits the ceiling, it cannot, by law, rise any further
True
When is the price ceiling considered not binding?
When it is set above the equilibrium price
True or False:
When the price ceiling is not binding it has no effect on the price or quantity sold
True
When is the price ceiling considered a binding constraint?
When it is set below the equilibrium price
What can a binding constraint price ceiling cause?
A shortage
When the price ceiling has no effect what tends to naturally move the economy towards the equilibrium price?
Market supply and demand forces
When the government imposes a price ceiling above the equilibrium price does the market price equal the price ceiling or the equilibrium price?
The equilibrium price
When the government imposes a price ceiling below the equilibrium price does the market price equal the price ceiling or the equilibrium price?
The price ceiling
What are the two outcomes that are possible when the government imposes a price ceiling?
- A price ceiling that is binding
2. A price ceiling that is not binding
When is the price floor considered not binding?
When it is set below the equilibrium price
What is the price floor considered binding?
When it is set above the equilibrium price
When the price floor is set above the equilibrium price what can it cause?
A surplus
What does setting the price floor above the equilibrium cause the market price to equal?
The price floor
What does setting the price floor below the equilibrium cause the market price to equal?
The equilibrium
What does a price floor do to the quantity supplied?
It causes it to exceed quantity demanded
What does a price ceiling do to the quantity demanded?
It causes it to exceed quantity suppled
What are usually a good way to organize economic activity?
Markets
What is a policy where the government can pay for a fraction of the rent for poor families?
Rent subsidies
What is a policy where the living standards of the working poor are raised without discouraging firms from hiring them?
Wage subsidies
What’s an example of a wage subsidy?
The earned income tax credit
