Microeconomics - Chapter 5

Price Controls

If we are trying to figure out the quantity exchanged between supplies and demand, how would you determine if the following are the scenarios?

a) quantity demanded > quantity supplied
b) quantity demanded < quantity supplied

a) supplies will be used to determine the quantity exchanged
b) demand will be used to determine the quantity exchanged

whichever is the lowest number between supply and demand will be the one used to determine the quantity exchanged

what’s disequilibrium

this is when the quantity demanded for goods/services does not equal to the quantity supplied for goods/services

what is price floor and price ceiling?

Price floor is the minimum payment, while price ceiling is the maximum payment.

where can you see the excess supply and excess demand in a graph?

Excess supply is located on the top triangle, while the excess demand is at the bottom of the triangle

How will employers react if the price floor is higher than the equilibrium wage?

If the price floor is higher than equilibrium wage, it means that government is setting a minimum wage law that most employers cannot afford. Due to this, some employers may have to cut off benefits, work schedules or even lay off people, which increases the rate of unemployment.

How will non-employers react if the price floor is higher than the equilibrium wage?

If the price floor is higher than the equilibrium wage, it means that the minimum wage will be higher than usual. Due to this, the minimum that is set will be more attractive to people; therefore, competition to getting a job will be higher

what’s the difference between binding price ceiling and non binding price ceiling

Binding price ceiling is when the equilibrium price is less than the price ceiling. This means that the prices they usually charge in must be altered to a lower price since the maximum payment for those goods/services has been set below than what the market usually charges. Therefore, suppliers would be less interested to produce those goods/services since they cannot earn a lot of revenue.

Non binding price ceiling is when the price ceiling is greater than the price equilibrium. This means that the prices they usually charge in is more than the legal maximum payment. Therefore, suppliers have more freedom to decide their price allowing them to earn a higher profit.

what are the pros of having price ceiling

1. To restrict production on resources that are limited

2. To keep specific prices down

3. To create fairness amongst the upper and lower class in basic goods

what’s market effiiciency

market efficiency is when the market is being allocated in a way that create wins for both parties

what’s economic surplus

its when there is a surplus in both consumers and producers

what’s consumer surplus

its the difference between what consumers are willing to pay and what they actually need to pay

what’s producer surplus

producer surplus is the difference between what the producers are paid and the lowest price they are willing to accept

what does economic surplus mean in the perspective of both sellers and consumers? is it when the benefit is greater than the cost or cost greater than benefit

economic surplus is when the market is producing goods or services that have greater benefit than cost

How do you calculate the are of economic surplus?

Ex: The cost to produce goods is $5, while consumers are only willing to pay $20

Find the difference between what consumers are willing to pay and how much does the good cost in production

20 - 5 = $15 economic surplus

how does price floors affect the price of goods

If the price floor is higher than the equilibrium wage, businesses would have to pay workers a greater amount than what they can only afford. Therefore, to save the business, they would have to increase their prices in order to pay off the minimum wage

How does price floor affect the quantity demanded

If price floor is higher than the equilibrium wage, businesses would have to increase their prices in order to afford the minimum wage. And since most consumers are price sensitive, the demand for their goods would go down as consumers realize that the price of the goods are no longer affordable

What is deadweight loss

Deadweight loss shows the effects of impositions of price floor being higher than price equilibrium. It shows how the decrease of quantity demanded resulted to the decrease of quantity supplied, which represents the drop in quantity traded that could have not happen.