ECON 003 Chapter 3 Part 3

Flashcards based on Chapter 3 Lecture Slides covering Price Controls, Efficiency, and Surplus.

What are price controls?

Laws that governments enact to regulate prices instead of allowing the market alone to decide prices.

What is a price ceiling?

A legal maximum price, where transactions above this price are illegal.

Give examples of price ceilings.

Rent control and anti-gouging laws during natural disasters.

What is a price floor?

A legal minimum price, where transactions below this price are illegal.

Give examples of price floors.

Minimum wage and agricultural price supports.

When is a price ceiling binding?

When it is set below the market equilibrium price, causing a shortage.

When is a price ceiling not binding?

When it is set above the market equilibrium price, causing no shortage.

What are the effects of rent control?

A shortage of rental units, decreased maintenance by landlords, and lower quality housing.

When is a price floor binding?

When it is set above the market equilibrium price, causing a surplus.

When is a price floor not binding?

When it is set below the market equilibrium price, causing no surplus.

What are the potential effects of minimum wage?

Job losses due to employer responses like automation or downsizing and reduced employee benefits.

What is consumer surplus?

The extra benefit consumers receive from buying a good or service, measured by what they would have been willing to pay minus what they actually paid.

What is producer surplus?

The extra benefit producers receive from selling a good or service, measured by the price received minus the price they would have been willing to accept.

What is social surplus?

The sum of consumer surplus and producer surplus, also called economic surplus or total surplus.

What characterizes economic efficiency in a market?

Social surplus is larger at the equilibrium price and quantity than at any other point. It is impossible to increase consumer surplus without reducing producer surplus or vice versa.

What is deadweight loss?

The loss in social surplus when a market produces an inefficient quantity.

What is the overall effect of price ceilings and price floors?

They block transactions that buyers and sellers would have been willing to make at the equilibrium price, resulting in deadweight loss so removing them increases social surplus.

Regarding the scenario where a price ceiling of $12 per pound is set on tea, but the market price of tea is $20 per pound, what will happen to the deadweight loss?

Deadweight loss will increase

Regarding the scenario where a price ceiling of $12 per pound is set on tea, but the market price of tea is $20 per pound, what will happen to the social surplus?

Social surplus will decrease.

Regarding the scenario where a price ceiling of $12 per pound is set on tea, but the market price of tea is $20 per pound, what will happen to the producer surplus?

Producer surplus will decrease.