Microeconomics Chapter 5: Price Controls and Quotas

Vocabulary flashcards covering core terms, definitions, and concepts related to price controls, quotas, and market interventions from Chapter 5.

Price controls

Legal restrictions on how high or low a market price may go.

Price ceiling

The maximum price sellers are allowed to charge for a good or service.

Price floor

The minimum price buyers are required to pay for a good or service.

Deadweight loss

The value lost when fewer goods are bought and sold than would be optimal for the market.

Inefficient allocation to consumers

When the product goes to people who value it less, while people who want it more don’t get it.

Wasted resources

A form of inefficiency in which people expend money, effort, and time to cope with the shortages caused by a price ceiling.

Inefficiently low quality

A form of inefficiency caused by price ceilings where sellers offer low-quality goods at a low price even though buyers would prefer a higher quality at a higher price.

Black market

A market in which goods or services are bought and sold illegally, either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price ceiling.

Minimum wage

A legal floor on the wage rate, which is the market price of labour.

Inefficient allocation of sales among sellers

When the sellers who could sell for the lowest cost are not always the ones who get to sell due to price floors.

Inefficiently high quality

A form of inefficiency caused by price floors where sellers offer high-quality goods at a high price even though buyers would prefer a lower quality at a lower price.

Quantity control

An upper limit on the quantity of some good that can be bought or sold; also referred to as a quota.

Quota limit

The total amount of a good that can be legally transacted under a quantity control system.

Licence

A permit that permits someone to sell a certain good when the government limits how much can be sold.

Demand price

The price buyers are willing to pay for a certain amount of a good.

Supply price

The price at which producers will supply a given quota quantity.

Wedge

The gap between the price buyers pay and the price sellers would accept.

Wedge = Demand Price - Supply Price = quota rent per unit

Quota rent

The extra money someone can earn from owning a license or permit that allows them to sell a limited good.

Ex. A taxi license lets a driver earn an extra 20K; the extra money is quota rent.

Formula for consumer surplus with a linear demand curve

Consumer Surplus = 1/2 × Quantity at Equilibrium x (Maximum Price - Equalibrium Price)

Formula for producer surplus with a linear supply curve

Producer Surplus = 1/2 × Quantity at Equilibrium x (Equalibrium Price - Minimum Price)