Suppy, demand and government policies Flashcards
(15 cards)
What role do market forces play in a free, unregulated market system?
They establish equilibrium prices and quantities.
Why might equilibrium conditions not satisfy everyone?
While they may be efficient, they can lead to dissatisfaction among some buyers or sellers.
What is a price ceiling?
A legal maximum on the price at which a good can be sold (e.g., rent control).
What is a price floor?
A legal minimum on the price at which a good can be sold (e.g., minimum wage).
What happens when a price ceiling is set above the equilibrium price?
It is non-binding and has no effect on market outcomes.
What occurs when a binding price ceiling is set below the equilibrium price?
It leads to a shortage because quantity demanded exceeds quantity supplied.
How do binding price ceilings create inefficiencies in the market?
They result in non-price rationing mechanisms such as long lines or discrimination by sellers.
What happens when a price floor is set below the equilibrium price?
It is non-binding and has no effect on market outcomes.
Describe what occurs with a binding price floor set above the equilibrium price.
It creates a surplus because quantity supplied exceeds quantity demanded.
Why are markets generally considered an effective way to organize economic activity?
Prices serve as signals that guide resource allocation; restrictions alter this allocation.
How can government-imposed minimum wages negatively impact employment?
They can lead to job losses if employers cannot afford to hire at higher wage levels.
Why might rent control reduce affordable housing availability and quality?
By capping rents, landlords may have less incentive to maintain or provide rental properties.
What purpose do taxes serve in an economy?
They raise revenue for public projects like roads and schools.
Explain tax incidence.
Tax incidence refers to how the burden of a tax is shared among participants in a market, depending on supply and demand elasticities.
In the example of an ice cream tax imposed on sellers, what happens to prices paid by buyers and received by sellers?
Buyers pay more (e.g., €0.30 more), while sellers receive less (e.g., €0.20 less) due to the tax wedge created by taxation.
