Price Controls and Market Dynamics

Flashcards covering key concepts related to price controls, their impacts on markets, and associated economic principles.

What is a price ceiling?

A price ceiling is a legal maximum price that can be charged for a good or service.

Under what condition does a price ceiling become binding in a market?

A price ceiling becomes binding when it is set below the equilibrium price.

What immediate impact does a binding price ceiling have on quantity demanded and supplied?

It increases quantity demanded and decreases quantity supplied, creating a shortage.

What is a potential unintended consequence of a binding price ceiling?

The development of a black market.

What is a price floor?

A price floor is a legal minimum price that can be charged for a good or service.

Under what condition does a price floor become binding in a market?

A price floor becomes binding when it is set above the equilibrium price.

Give a real-world example of a price floor.

The minimum wage in the labor market.

What impact does a binding price floor have on quantity demanded and supplied?

It increases quantity supplied and decreases quantity demanded, creating a surplus.

Define deadweight loss in the context of price controls.

Deadweight loss is the reduction in total surplus that results from a market inefficiency caused by price controls.

Why do price ceilings and price floors typically lead to deadweight loss?

They prevent mutually beneficial transactions from occurring, as the quantity traded is lower than the efficient equilibrium quantity.

Differentiate between consumer surplus and producer surplus.

Consumer surplus is the difference between what consumers are willing to pay and what they actually pay; producer surplus is the difference between the price producers receive and their cost of production.

How does a binding price ceiling affect consumer and producer surplus?

It generally increases consumer surplus for those who can purchase the good but decreases producer surplus.

How does elasticity influence the size of the shortage or surplus from a price control?

More elastic demand or supply leads to a larger shortage for a price ceiling and a larger surplus for a price floor.

Why might governments choose to implement price controls despite potential negative consequences?

They may aim to make goods more affordable for consumers or to support producers by ensuring minimum prices.

What is the effect of a non-binding price ceiling or floor on market equilibrium?

Non-binding price controls have no direct effect on market equilibrium as they are set above or below the equilibrium price.