Chapter 8: Price Ceilings and Floors (Price Controls)

Vocabulary flashcards covering key terms and concepts from Chapter 8 on price ceilings and floors.

Price Controls

Government-imposed rules that make it illegal for prices to rise above a maximum (ceiling) or fall below a minimum (floor).

Price Ceiling

A legal maximum price that sellers can charge, set below equilibrium; examples include rent control and 1970s gasoline caps.

Price Floor

A legal minimum price that buyers must pay, set above equilibrium; common example is the minimum wage.

Equilibrium Price

The market price at which quantity supplied equals quantity demanded and total surplus is maximized.

Total Surplus

Combined consumer and producer surplus, maximized at equilibrium and reduced by price controls.

Shortage

A condition of excess demand (Qd > Qs) that occurs when a price ceiling is set below the market price.

Reduction in Product Quality

Sellers’ response to ceilings by cutting quality or service instead of raising price—e.g., fewer matzo balls in soup or reduced store hours.

Wasteful Lines (Search Costs)

Non-price methods of rationing under ceilings—time spent waiting in line or paying bribes—creating extra social cost.

Gains from Trade

Mutually beneficial exchanges that occur when buyers’ willingness to pay exceeds sellers’ minimum acceptable price; some are lost under controls.

Deadweight Loss

The reduction in total surplus (lost consumer plus producer surplus) stemming from market distortions like ceilings or floors.

Misallocation of Resources

When controlled prices prevent resources from flowing to their highest-valued uses—e.g., heating oil not shipped to colder regions.

Bribe (under Price Controls)

An illicit payment to sellers that circumvents a price ceiling; differs from waiting costs because the money goes to the supplier.

1971 Nixon Price & Wage Freeze

A historical example where President Richard Nixon temporarily froze all U.S. prices and wages, illustrating extensive price control.

Minimum Wage Law

A type of price floor that sets the lowest legal hourly pay for labor, potentially creating labor surpluses (unemployment).

Rent Control

A price ceiling on housing rents aimed at affordability but often generating shortages and reduced maintenance quality.