chapter 4: market equilibrium and policy

equilibrium price

the price at which the quantity supplied of a good, service, or resource equals the quantity demanded; the price at which the demand and supply curves intersect. market clearing price

shortage

a situation in which the quantity demanded is greater than the quantity supplied at the current market price. also called excess demand.

surplus

a situation in which the quantity supplied is greater than the quantity demanded at the current market price. also called excess supply

price ceiling

a maximum legal price at which a good, service, or resource can be sold

nonbinding price ceiling

a maximum legal price that is set above the existing equilibrium price. because the market equilibrium price is lower than the price ceiling, the ceiling has no effect on the market and is said to be nonbinding

binding price ceiling

a maximum legal price that is set below the existing equilibrium price. because the market equilibrium price is greater than the price ceiling, the ceiling restricts trade and is said to be binding

price floor

a minimum legal price at which a good, service, or resource can be sold

nonbinding price floor

a minimum legal price that is set below the existing equilibrium price. because the market equilibrium price is greater than the price floor, the floor has no effect on the market and is said to be nonbinding

binding price floor

a minimum legal price that is set above the existing equilibrium price. because the market equilibrium price is lower than the price floor, the floor restricts trade and is said to be binding

excise tax

a tax based on the number of units purchased, not the price paid for a good or service

tax revenue 

tax X qt (quantity traded)