Week 8 - Applying the Competitive Model Flashcards
1
Q
How do you calculate consumer surplus in a free market?
A
CS=TS-PS or 0.5PQ
2
Q
What is a price floor?
When is it effective?
What situation does it create?
A
When a government sets a minimum price of a commodity
When price floor is set above Q*
Creates a surplus of supply
3
Q
What is a price ceiling?
When is it effective?
What situation does it create?
A
When a government sets the highest price for a commodity
When price is set below Q*
Creates a shortage of supply
4
Q
Who is best off in a “free trade economy”
A
Consumers
- They receive lower prices and higher surplus
