Introduction to Economics: Price Controls

These flashcards cover key concepts surrounding price controls in economics, including definitions of price ceilings, floors, and their implications for markets.

Price Ceiling

A regulation that sets the maximum price that can be legally paid for a good or service, binding only when set below the equilibrium price.

Price Floor

A regulation that sets the minimum price that can be legally paid for a good or service, binding only when set above the equilibrium price.

Transfer

Surplus that moves from producers to consumers, or vice versa, as a result of a regulation.

Deadweight Loss (DWL)

The reduction in total surplus that occurs as a result of a market inefficiency.

Binding Price Ceiling

A price ceiling that forces the price below the equilibrium, thereby creating a shortage.

Agricultural Price Support (APS)

A price floor mechanism that produces necessities and is subject to natural disasters and volatile weather.

Minimum Wage

The lowest amount that can legally be paid for labor, originally established in 1938 at 25 cents per hour.

Surplus

Occurs when the quantity supplied exceeds the quantity demanded at a given price floor.

Efficiency vs. Equity Trade-off

The trade-off between ensuring equitable allocation of resources and increasing social surplus or total output.

Market Implications of Price Controls

Price controls can lead to inefficiencies and market shortages or surpluses depending on whether they are ceilings or floors.

Price Ceiling

A regulation that sets the maximum price that can be legally paid for a good or service, binding only when set below the equilibrium price.

Price Floor

A regulation that sets the minimum price that can be legally paid for a good or service, binding only when set above the equilibrium price.

Transfer

Surplus that moves from producers to consumers, or vice versa, as a result of a regulation.

Deadweight Loss (DWL)

The reduction in total surplus that occurs as a result of a market inefficiency.

Binding Price Ceiling

A price ceiling that forces the price below the equilibrium, thereby creating a shortage.

Agricultural Price Support (APS)

A price floor mechanism that produces necessities and is subject to natural disasters and volatile weather.

Minimum Wage

The lowest amount that can legally be paid for labor, originally established in 1938 at 25 cents per hour.

Surplus

Occurs when the quantity supplied exceeds the quantity demanded at a given price floor.

Efficiency vs. Equity Trade-off

The trade-off between ensuring equitable allocation of resources and increasing social surplus or total output.

Market Implications of Price Controls

Price controls can lead to inefficiencies and market shortages or surpluses depending on whether they are ceilings or floors.

When a binding price ceiling is imposed, what area on a supply and demand graph represents the resulting shortage?

The horizontal distance between the quantity demanded and the quantity supplied at the ceiling price.

On a supply and demand graph, how is the surplus created by a binding price floor illustrated?

It is the horizontal distance between the quantity supplied and the quantity demanded at the floor price.

Graphically, what area signifies Deadweight Loss (DWL) after a price control, and what does it represent?

DWL is typically represented by a triangle pointing towards the equilibrium, located between the supply and demand curves. It signifies the lost total surplus (producer and consumer surplus) due to the inefficiency caused by the price control.

How do price controls on a graph demonstrate the efficiency vs. equity trade-off?

Price controls often lead to Deadweight Loss (reduced efficiency, represented by the DWL triangle) while simultaneously redistributing surplus from one group to another (e.g., producers to consumers under a price ceiling, or vice versa under a price floor

— an equity consideration represented by the transfer of surplus).