Supply, Demand and Government Policies (CHAPT 7)

Vocabulary flashcards covering government interventions in markets, including price controls, taxes, subsidies, and their impacts on economic surplus.

Price Ceiling

A legal maximum on the price of a good or service, such as rent control.

Price Floor

A legal minimum on the price of a good or service, such as the minimum wage.

Consumer Surplus

The difference between what a consumer is willing to pay and the price of the product or service.

Producer Surplus

The difference between the market price of the good and the lowest price a producer is willing to accept for the good or service.

Deadweight Loss

The total of lost consumer and producer surplus when all mutually profitable gains from trade are not exploited.

Shortage

The market result when a price ceiling is set below the equilibrium price, causing $Q_S$ to be less than $Q_D$.

Misallocation of Resources

A result of price controls that distorts signals and prevents resources from flowing to their highest-valued uses.

Binding Constraint

A condition where a price control prevents the market from reaching equilibrium, such as a price floor set above the equilibrium wage causing a surplus (unemployment).

Wasteful Quality Increases

An effect of price floors where sellers waste resources on higher quality than buyers are willing to pay for, because they cannot compete by lowering prices.

Commodity Tax

A tax on goods, such as a sales tax, that creates a wedge between the price buyers pay and the price sellers receive.

Tax Incidence

How the burden of a tax is shared amongst participants, which depends on the relative elasticities of supply and demand.

The Wedge

The difference between the price paid by buyers ($P_B$) and the price received by sellers ($P_S$) created by a tax or subsidy.

Relative Elasticity Rule

The principle that the less elastic side of the market will bear the greater share of a tax burden, while the more elastic side will pay a smaller share.

Subsidy

A reverse tax where the government gives money to consumers or producers, calculated as $ext{Price Received by Sellers} - ext{Price Paid by Buyers}$.

Value of Wasted Time

A component of the total lost consumer surplus under price ceilings, occurring when consumers must wait in lines or deal with shortages.