Economics: Price Control and Elasticity of Demand

Flashcards covering key concepts in price control, elasticity of demand, market welfare, consumer and producer surplus, and market efficiency.

What is price control?

Government intervention where policymakers enact laws regarding the maximum and minimum prices for goods and services.

What is a price ceiling?

A legal maximum on the price at which a good can be sold, imposed when the price is unfair to buyers.

Define binding constraint in terms of price ceilings.

When a price ceiling is imposed below the equilibrium price, preventing supply and demand from reaching market equilibrium, resulting in a shortage.

What occurs as a response to a binding price ceiling?

Rationing, which may involve long lines, first-come-first-serve access, or favoring certain individuals.

What is a price floor?

A legal minimum on the price at which a good can be sold, imposed when the price is unfair to sellers.

Define binding constraint in terms of price floors.

When a price floor is imposed above the equilibrium price, preventing supply and demand from reaching market equilibrium, resulting in a surplus.

What determines price elasticity of demand?

The responsiveness of the quantity demanded to changes in price.

What does it mean if demand is elastic?

Quantity demanded responds substantially to changes in price.

What are the determinants of price elasticity?

Availability of close substitutes, necessities vs luxuries, definition of the market, and time horizon.

How does the concept of time affect price elasticity?

Short-term demand tends to be inelastic because consumers adjust slowly, while long-term demand tends to be elastic as consumers find alternatives.

What is the significance of the demand curve's slope?

A flatter demand curve indicates greater price elasticity, while a steeper demand curve indicates lesser elasticity.

What does total revenue mean?

The total amount paid by buyers and received by sellers of a good, calculated as price times quantity sold.

How does price elasticity affect total revenue when demand is inelastic?

Increasing price leads to increased total revenue because price and revenue move in the same direction.

What is income elasticity of demand?

It measures how the quantity demanded changes as consumer income changes.

What is cross-price elasticity?

It measures how demand for one good changes when the price of another good changes, indicating whether they are substitutes or complements.

What does price elasticity of supply measure?

How much the quantity of a good responds to a change in its price.

What factors influence the price elasticity of supply?

Flexibility of the seller to change, length of the production period, market entry barriers, ease of accumulating stocks, and time scale.

What is market welfare?

The overall well-being or benefit that all participants (buyers and sellers) receive from participating in a market.

What is consumer surplus?

The benefit buyers receive from participating in a market, calculated as the amount willing to pay minus the actual price paid.

What is producer surplus?

The amount a seller is paid minus the cost of production, measuring the benefit sellers receive from the market.

What is market efficiency?

Achieved when the allocation of resources maximizes total surplus.

What challenges contribute to market failure?

Market power and externalities can prevent efficient market allocations.