market equilibrium and policy
what is another name for equilibrium price
market clearing price
how does the market adjust to a surplus
market lowers price
price ceilings
maximum allowable price typically set below EP
price floors
minimum allowable price typically set above equilibrium price
what effect does a price ceiling set above EP have
none
what effect does a price floor below EP have
none
what happens to the demand of a good when there is tax on the consumers
the demand is reduced
when a market is in equilibrium, the price that consumers pay and the price that producers receive exactly balances what
the marginal benefit and marginal cost of consuming and producing a product
what effect does the price have on a surplus
the price is too high and it must fall to reach equilibrium price
what effect does the price have on a shortage
the price is too low and it must rise to reach equilibrium price
suppose there is surplus in the market. We can say ___.
the price will fall
when there is an increase in supply in the market, we can predict ___.
the price will fall and the quantity will rise
equilibrium quantity
the quantity traded when the quantity supplied of a good/service/resource = quantity demanded
what happens to the supply of a good when there is tax on the producers
the supply is reduced
what happens when a market is not in equilibrium
too much or too little is being produced (surplus or shortage)
true or false: both types of tax have the same effects
true
price controls
used when government wants to prevent the market from establishing an equilibrium price
when will quantity rise
when increase in demand raises prices and quantity when increase in supply reduces prices and quantity
equilibrium price
when price of the quantity supplied of a good/service/resource = the quantity demanded
equilibrium
when the desires of the buyers and sellers balance with the market
shortage
when the quantity demanded is larger than the quantity supplied at a given price quantity demanded>quantity supplied
surplus
when the quantity supplied is larger than the quantity demanded at a given price quantity supplied>quantity demanded
ad valorem tax
tax based on the amount paid or earned
excise tax
tax based on the number of units produced or sold
what is the formula for tax revenues
tax revenues= txQ t= tax
what are the 3 conditions that must be met for a market to reach equilibrium
1) consumers need info about different suppliers prices so they can choose the lowest price 2) firms must be able to monitor inventories 3) firms must be able to change price of product to adjust it towards the equilibrium price
what effects do taxes have on both producers and consumers
1) raises the price consumers pay 2) reduces the price producers receive 3) reduces quantity sold in the market 4) generates tax revenues equal to tax (t) times quantity sold (tax revenue= txQ)
what happens when there is a change in a variable other than price
a shift in either demand or supply or both results in the EP and EQ to change
what does a price floor set above EP create
a surplus in the market
a binding price floor is set ___.
above the EP
whats example of a price floor
agricultural price supports minimum wage laws
you observe that the price in the market has gone up and the quantity has gone up. This must have been the result of ___.
an increase in demand
what is a price ceiling designed to do
benefit consumers government social goal achievement
what is a price floor designed to do
benefit producers used for government to achieve a social goal they want to meet
wheat is used to make flour. An increase in the price of wheat will ___.
cause the supply curve to shift to the left
example of an excise tax
cig tax
when will quantity fall
decrease in demand lower prices and quantity decrease in supply raises prices and lowers quantity
when will prices fall
decrease in demand lowers prices and quantity increase in supply lowers prices and increases quantity
what are the two types of taxes
excise/specific tax ad valorem tax
true of false: an excise tax on producers usually results in higher tax revenues than an equal excise tax on consumers.
false
true or false: an increase in the price of fuzzy dice will increase the supply of fuzzy dice.
false
what does the speed of adjustment process depend on
how quickly the 3 conditions to reach equilibrium are met
when will price rise
increase in demand raises price and quantity decrease in supply raises price and lowers quantity
how does an increase in supply affect price and quantity
price decreases quantity increases
what does a price floor prevent
price from falling to EP
what does a price ceiling prevent
price from rising to EP
how does an increase in demand affect price and quantity
price increases quantity increases
if there is simultaneously an increase in demand and a decrease in supply, we can predict ___.
price will rise, but the effect on quantity cannot be determined
what is the formula for equilibrium
quantity supplied=quantity demanded
what does the market do to adjust a shortage
raise prices
what are examples of price ceilings
rent controls controls on ticket prices to Olympic events
example of ad valorem tax
sales tax
a price ceiling set below EP will create what
shortage
