Economic Surplus and Price Controls

These flashcards cover key concepts related to economic surplus, price controls, and their impacts on markets, specifically focusing on price floors and ceilings.

What maximizes total economic surplus in a competitive equilibrium?

Marginal benefit equals marginal cost.

What are price controls?

Regulations imposed by the government on how low or high a price can be.

What is a price floor?

A minimum price set by the government that must be paid for a good or service.

What is a common example of a price floor?

Minimum wage.

What does a price ceiling do?

Sets a maximum price that can be charged for a good or service.

What is a common example of a price ceiling?

Rent control.

What is the effect of a price floor set below the equilibrium price?

It does not affect the market.

What happens when a price floor is set above the equilibrium price?

A surplus occurs because quantity supplied exceeds quantity demanded.

What is deadweight loss?

The loss in economic efficiency when equilibrium is not achieved.

In the context of a price floor, what happens to consumer surplus?

Consumer surplus decreases as fewer goods are exchanged.

What areas represent deadweight loss due to a price floor?

The areas lost (c and e) that represent lost trades.

Who benefits from a price floor?

Producers may benefit if the price is higher than their willingness to sell.

What typically happens to surplus goods created by price floors in agriculture?

The government may buy them, ship them abroad, or destroy them.

What is the relationship between producer surplus and consumer surplus under a price floor?

Producer surplus may increase while consumer surplus decreases, leading to a lower economic surplus overall.