Supply, Demand, and Government Policies

Flashcards covering key concepts related to supply, demand, price controls, taxation, and externalities.

Price Ceiling

A legal maximum price set by the government, binding if below equilibrium, causing a shortage.

Price Floor

A legal minimum price set by the government, binding if above equilibrium, causing a surplus.

Binding Price Control

A price control that forces the market to operate at a price different from equilibrium.

Willingness to Pay (WTP)

The maximum amount a buyer is willing to pay for a unit; reflects the height of the demand curve.

Consumer Surplus (CS)

The difference between WTP and the market price; represented as the area under the demand curve and above the price.

Willingness to Sell (WTS)

The seller's opportunity cost; reflects the height of the supply curve at each quantity.

Producer Surplus (PS)

The difference between the market price and the seller's cost; represented as the area above the supply curve and below the price.

Total Surplus (TS)

The sum of consumer and producer surplus, representing the total value to buyers minus the total cost to sellers.

Tax Incidence

The division of the tax burden between buyers and sellers, generally falling more heavily on the less elastic side of the market.

Deadweight Loss (DWL)

The reduction in total surplus that occurs when the quantity traded is below the market equilibrium due to a tax.

Externality

An uncompensated effect of one agent's actions on another; can be negative (social cost > private cost) or positive (social value > private value).

Coase Theorem

A principle that asserts that private bargaining will lead to an efficient outcome if property rights are well-defined and transaction costs are negligible.