AP Micro Unit 2

Price Controls

Legal restrictions on market price levels.

How does government intervene when price doesn't please buyers or sellers?

by imposing price controls

Price Ceiling

Maximum price sellers can charge for goods.

Price Floor

Minimum price buyers must pay for goods.

Shortage

Excess demand when price is below equilibrium.

Surplus

Excess supply when price is above equilibrium.

a price ceiling is __ equilibrium price

below

a price floor is ___ equilibrium price

above

a price ceiling doesn't let price ___ anymore

rise

a price floor doesn't let price ___ anymore

fall

How do price ceilings cause Inefficiency? (4 ways)

1. inefficient allocation to consumers

2. wasted resources

3. low quality

4. black markets

Minimum Wage

Legal floor on wage rates for labor.

School Lunches

Government buys surplus milk to sell at discount.

The constant surplus from a price floor creates what?

inefficiency

what are some of the inefficiencies caused by price floors?

low quality, wasted resources, inefficient allocation of sales among sellers, inefficiently high quality, illegal activity

Quantity Control (Quota)

Limit on quantity of goods bought or sold.

a quantity control must be where on a SD model?

to the left of equilibrium price

Deadweight Loss

Loss between quota and equilibrium

License

gives its owner the right to supply a good, or even oversupply a good

For a quota, the price paid by buyers is ____ that that received by sellers

higher

Quota

difference between demand and supply price at the quota limit (line through the graph)

Demand

Quantity consumers are willing to buy at price.

Need

Essential goods or services for survival.

Want

Non-essential goods or services desired by consumers.

Goods

Physical items produced in an economy.

Services

Activities produced in an economy.

Incentive

Motivation driving behavior in economic decisions.

Intrinsic motivation

comes from within

Extrinsic motivation

do something to gain an external reward

Elasticity

Responsiveness of demand or supply to price changes.

-more focused on demand

demand is elastic if

price elasticity of demand is greater than 1

demand is inelastic if

price elasticity of demand is less than 1

demand is unit elastic if

price elasticity of demand is exactly one

perfectly inelastic demand is a

vertical line

perfectly elastic demand is a

horizontal line

inelastic demand

insensitive to changes in price or income

elastic demand

change in quantity demanded due a change in price is large

4 determinants of elasticity

1. availability of substitutes

2. necessity vs luxury

3. time horizon

4. proportion of income spent

availability of substitutes

more substitutes makes demand more elastic

necessity vs luxury

necessities are inelastic, luxuries are more elastic

time horizon

elasticity increases over time as consumers/producers adjust

proportion of income spent

expensive items are more elastic

Price Elasticity of Demand (PED)

Responsiveness of quantity demanded to price changes.

PE of D =

(% change in quantity demanded)/(%change in price)

Cross Price Elasticity of Demand (XED)

Effect of one good's price change on another's demand.

positive CPE indicates two goods are

substitutes

negative CPE indicates two goods are

complements

Income Elasticity of Demand (YED)

Responsiveness of demand to changes in consumer income.

Total Revenue

Total sales value of a good or service.

total revenue =

price x quantity sold

-this creates a box

Marginal Analysis

Comparison of additional benefits and costs.

how do consumers use marginal analysis?

to determine whether purchasing one more unit of a good or service is worth it

how do suppliers use marginal analysis?

to set prices and maximize profit

Marginal Utility

Additional satisfaction from consuming one more unit.

If MB > MC then...

consumers buy more

If MB < MC then

consumers stop buying

consumers buy until....

marginal utility = price

Total Surplus

generated in a market, is the total net gain to consumers and producers from trading in the market. Sum of the producer and the consumer surplus.

Productive Efficiency

Producing goods at the lowest cost possible.

Allocative Efficiency

Producing goods that consumers actually want.

Free markets use incentives and competition to acheive what?

allocative and productive efficiency

What 3 things do Efficiency of Markets do?

1. Reallocate consumption among consumers

2. Reallocate sales among sellers

3. Change the quantity traded

Tax

Mandatory payment to governments for services.

What are the reasons for taxes?

1. Funding public services and infrastructure

2. Redistributing wealth and promoting equity

3. Regulating the economy

4. Ensuring stability and public order

Direct Taxes

Taxes paid directly to the government.

Indirect Taxes

Taxes imposed on goods, collected by sellers.

Progressive Tax

Tax rate increases more than income rises.

Regressive Tax

Tax rate decreases as income rises.

Proportional Tax

Tax rate remains constant regardless of income.

Income Tax

Tax on total income minus deductions.

Deductions

Allowable expenses reducing taxable income.

Sin Tax

Tax on harmful goods or activities.

Sales Tax

Tax collected from consumers on purchases.

Property Tax

Tax based on property value for local services.

Corporate Income Tax

Tax on profits earned by corporations.

Inheritance/Estate Tax

imposed on the transfer of wealth after someone's death

Estate tax

paid by the estate before assets are distributed to heirs

Inheritance tax

paid by the recipient who inherits money or property

Payroll Tax

tax collected from employers and employees based on wages and salaries paid to workers

Excise tax

applies to specific goods or services, Typically fixed amount per unit rather than percentage of price