Price Ceilings and Floors

These flashcards cover key concepts related to price ceilings and floors, including definitions, consequences, and market behaviors.

What is a price ceiling?

A maximum price allowed by law.

What are the effects of price ceilings?

They create shortages, reductions in product quality, wasteful search costs, lost gains from trade, and misallocation of resources.

What creates a shortage with price ceilings?

When the price ceiling is set below the market price, resulting in quantity demanded (Qd) being greater than quantity supplied (Qs).

How do price ceilings lead to reductions in quality?

Sellers may cut quality or service instead of raising prices due to excess demand at the controlled price.

What is the consequence of wasteful lines in relation to price ceilings?

Demanders are willing to pay more than the controlled price, leading to bribes or waiting in lines as alternatives.

What is deadweight loss?

The reduction in surplus caused by a market distortion or inefficiency.

How do price ceilings misallocate resources?

Price controls prevent resources from flowing to their highest-valued uses.

What is rent control?

A price ceiling on rental housing.

What happens over time with rent controls?

Shortages grow as fewer new apartments are built and existing units are converted to other uses.

What is a price floor?

A minimum price allowed by law.

What are the consequences of price floors?

They create surpluses, lost gains from trade, wasteful increases in quality, and misallocation of resources.

How does a minimum wage create unemployment?

By setting wages above market equilibrium, it results in a surplus of labor where quantity supplied exceeds quantity demanded.