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What is a price ceiling?
a maximum price allowed by law
What effects does a price ceiling create?
shortages, reductions in product quality, wasteful lines and other search costs, a loss of gains from trade, and a misallocation of resources
Why are there reductions in qualities?
suppliers have more customers than they have goods, so they start to cut quality because they need more
What is another type of reduction in quality?
reduction in services
Why could there be a reduction is services?
sellers normally have an incentive to please customers, but they have more than they need or want
What is a shortage?
when quantity demanded exceeds quantity supplied
How do you calculate a shortage?
quantity demanded - quantity supplied
What is the relationship between a controlled price and a market equilibrium price?
the lower the controlled price is compared to the market equilibrium price, the larger the shortage
Price controls eliminate competition: true or false
False
How do you calculate deadweight loss?
lost consumer surplus + lost producer surplus
What do price controls do?
distort signals and eliminate incentives
In a free market, what happens to the supply of goods?
it's bought by demanders with the highest willingness to pay
In a market with a price ceiling, what happens to the supply of goods?
the demanders with the highest willingness to pay can't signal their demands and the suppliers don't have an incentive to supply
Short run supply curves are what...
inelastic
Long run supply curves are what...
elastic
What can rent regulation do?
can protect tenants from sharp increases in rent, but it still allows prices to rise or fall in response to the market
When are rent freezes put into place?
when rents are rising
Where does controlled rent usually fall?
below the market equilibrium rent
What is a command economy?
an economy with permanent, universal price controls
What does minimum wage do?
creates unemployment
Note 
Flashcard (50)