Price controls

ECON 1030 Unit 5

Shortage

A situation in which the quantity demanded is greater than the quantity supplied at the current market price. Also called excess demand.

Surplus

A situation in which the quantity supplied is greater than the quantity demanded at the current market price. Also called excess supply

Price Ceiling

A maximum legal price at which a good, service, or resource can be sold.

Nonbinding Price Ceiling

A maximum legal price that is set above the existing equilibrium price. Because the market equilibrium price is lower than the price ceiling, the ceiling has no effect on the market and is said to be nonbinding.

Binding Price Ceiling

A maximum legal price that is set below the existing equilibrium price. Because the market equilibrium price is greater than the price ceiling, the ceiling restricts trade and is said to be binding.

Price Floor

A minimum legal price at which a good, service, or resource can be sold.

Nonbinding Price Floor

A minimum legal price that is set below the existing equilibrium price. Because the market equilibrium price is greater than the price floor, the floor has no effect on the market and is said to be nonbinding

Binding Price Floor

A minimum legal price that is set above the existing equilibrium price. Because the market equilibrium price is lower than the price floor, the floor restricts trade and is said to be binding.

Minimum Wage

The lowest wage firms can legally pay employees in the labor market.

Consumer Surplus

The difference between the maximum price consumers are willing and able to pay for a good or service and the price they actually pay. Consumer surplus also can be thought of as the wealth that trade creates for consumers in a market.

Welfare Economics

A branch of economics that focuses on measuring the welfare of market participants and how changes in the market change their well-being.

Producer Surplus

The difference between the price producers receive for a good or service and the minimum price they are willing and able to accept. Producer surplus also can be thought of as the wealth that trade creates for producers in a market.

Economic Surplus

The sum of consumer and producer surplus; a measure of the total welfare, or wealth, that trade creates for consumers and producers in a market. Also known as social welfare or total surplus