Price Controls and Market Distortions

Flashcards covering key vocabulary related to price controls, inflation, and their market consequences, as discussed in the lecture.

Hyperinflation

An extremely rapid increase in prices, exemplified by Venezuela's 130,000% inflation rate in 2018, leading to severe economic crisis and shortages.

Price Controls

Government-imposed regulations that set maximum (price ceilings) or minimum (price floors) prices for goods or services.

Price Ceiling

A legally imposed maximum price that can be charged for a good or service.

Binding Price Ceiling

A price ceiling set below the equilibrium price, which prevents the market price from rising to equilibrium and impacts the market by causing shortages.

Non-binding Price Ceiling

A price ceiling set above the equilibrium price, which has no effect on the market because the equilibrium price is already below the ceiling.

Price Floor

A legally imposed minimum price that can be charged for a good or service.

Binding Price Floor

A price floor set above the equilibrium price, which prevents the market price from falling to equilibrium and impacts the market by causing problems like surpluses.

Non-binding Price Floor

A price floor set below the equilibrium price, which has no effect on the market because the equilibrium price is already above the floor.

Rent Control

A common type of price ceiling applied to rental housing, setting a maximum limit on how much landlords can charge for rent to address affordability.

Rent Stabilization

A modern form of rent control that allows for controlled, limited increases in rent, often annually, as opposed to a fixed rent level.

Shortage

A market condition where the quantity demanded for a good or service exceeds the quantity supplied at a given price, often caused by a binding price ceiling.

Deadweight Loss

The loss of total surplus (consumer and producer surplus) that results from an inefficient allocation of resources due to market distortions like price controls.

Inefficient Allocation to Consumers

A drawback of price ceilings where the good or service does not necessarily go to those who value it most or have the greatest need.

Waste of Resources in Searching

Economic inefficiency occurring when individuals expend significant time and effort trying to find scarce goods or services under price controls.

Reduced Incentive for Quality/Maintenance

A consequence of price ceilings where suppliers (e.g., landlords) have less motivation to improve or maintain the quality of their goods or services due to limited pricing power.

Black Market

An illegal economic activity where goods and services are traded outside of government-regulated channels, often emerging in response to price controls.

Price Gouging Laws

Temporary price ceilings enacted during emergencies or natural disasters to prevent sellers from significantly increasing prices for essential goods.

Surge Pricing

A dynamic pricing strategy where prices for goods or services increase in response to a sudden rise in demand, such as for ride-sharing during peak hours, distinct from price gouging.

Minimum Wage

A specific example of a price floor defining the lowest hourly rate an employer can legally pay workers.

Federal Minimum Wage

The national baseline minimum hourly wage rate ($7.25 in the US) that must be paid to workers, overriding any lower state-level minimum wages.