Key Terms: Chapter 4 (Price Controls and Quotas)

Willingness to Pay

the maximum price at which a consumer’s be willing to pay to buy a good

Individual Consumer Surplus

the net gain to an individual buyer from the purchase of a good. It is equal to the difference between the buyer’s willingness to pay and the price paid

Total Consumer Surplus

the sum of the individual consumer surpluses of all the buyers of a good in a market

Consumer Surplus

often used to refer both to individual and to total consumer surplus

Seller’s Cost

the lowest price at which he or she is willing to sell a good

Individual Producer Surplus

the net gain to an individual seller from selling a good. It is equal to the difference between the price received and the seller’s cost

Total Producer Surplus

the sum of the individual producer surpluses of all the sellers of a good in a market. total producer surplus from sales of a good at a given price is the area above the supply curve but below that price

Producer Surplus

a term used to refer to both individual and total producer surplus

Total Surplus

the total net gain to consumers and producers from trading in the market. It is the sum of the producer and the consumer surplus

Price Controls

legal restrictions on how high or low a market price may go.

Price Ceiling

a maximum price sellers are allowed to charge for a good or service

Price Floor

a minimum price buyers are required to pay for a good or service

Deadweight Loss

the loss in total surplus that occurs whenever an action or a policy reduces the quantity transacted below the efficient market equilibrium quantity

Inefficient Allocation to Consumers

some people who want the good badly and are willing to pay a high price don’t get it, and some who care relatively little about the good and are only willing to pay a low price do get it

Wasted Resources

people expend money, effort, and time to cope with the shortages caused by the price ceiling

Inefficiently Low Quality

sellers offer low-quality goods at a low price even though buyers would prefer a higher quality at a higher price

Black Market

a market in which goods or services are bought and sold illegally—either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price ceiling

Minimum Wage

a legal floor on the wage rate, which is the market price of labor

Inefficient Allocation of Sales Among Sellers

sellers who are willing to sell at the lowest price are unable to make sales while sales go to sellers who are only willing to sell at a higher price

Inefficient High Quality

sellers offer high-quality goods at a high price, even though buyers would prefer a lower quality at a lower price.

Quantity Control

an upper limit on the quantity of some good that can be bought or sold

Quota

an upper limit on the quantity of some good that can be bought or sold

Quota Limit

the total amount of the good that can be legally transacted

License

gives its owner the right to supply a good

Demand Price

the price at which consumers will demand that quantity

Supply Price

the price at which producers will supply that quantity

Wedge

the demand price and the supply price of a good; that is, the price paid by buyers ends up being higher than that received by sellers

Quota Rent

the earnings that accrue to the license-holder from ownership of the right to sell the good. It is equal to the market price of the license when the licenses are traded