Market Equilibrium and Policy

tax revenue formula

TR = Tax * Quantity Traded (Qt)

nonprice determinant (demand)

A characteristic of the demand for a good, service, or resource other than its own market price. A change in a nonprice determinant of demand changes the relationship between price and quantity demanded, either increasing or decreasing quantity demanded at every price. Sometimes referred to as non-own-price determinant

nonprice determinant (supply)

A characteristic of the supply of a good, service, or resource other than its own market price. A change in a nonprice determinant of supply changes the relationship between price and quantity supplied, either increasing or decreasing quantity supplied at every price. Sometimes referred to as non-own-price determinant.

price ceiling

A maximum legal price at which a good, service, or resource can be sold.

nonbinding price ceiling

A maximum legal price that is set above the existing equilibrium price. Because the market equilibrium price is lower than the price ceiling, the ceiling has no effect on the market and is said to be nonbinding.

binding price ceiling

A maximum legal price that is set below the existing equilibrium price. Because the market equilibrium price is greater than the price ceiling, the ceiling restricts trade and is said to be binding.

price floor

A minimum legal price at which a good, service, or resource can be sold.

binding price floor

A minimum legal price that is set above the existing equilibrium price. Since the market equilibrium price is lower than the price floor, the floor restricts trade and is said to be binding.

nonbinding price floor

A minimum legal price that is set below the existing equilibrium price. Since the market equilibrium price is greater than the price floor, the floor has no effect on the market and is said to be nonbinding.

shortage

A situation in which the quantity demanded is greater than the quantity supplied at the current market price. Also called excess demand. Qs - Qd < 0

surplus

A situation in which the quantity supplied is greater than the quantity demanded at the current market price. Also called excess supply. Qs - Qd > 0

excise tax

A tax based on the number of units purchased, not on the price paid for a good or service

change in demand

An increase or decrease in the quantity demanded of a good, service, or resource at every price. Graphically, such changes are represented by a shift of the demand curve. Changes in demand are caused by changes in the nonprice determinants of demand.

change in supply

An increase or decrease in the quantity supplied of a good, service, or resource at every price. Graphically, such changes are represented by a shift of the supply curve. Changes in supply are caused by changes in a nonprice determinant of supply.

minimum wage

The lowest wage firms can legally pay employees in the labor market.

equilibrium price

The price at which the quantity supplied of a good, service, or resource equals the quantity demanded; the price at which the demand and supply curves intersect. Also known as the market-clearing price.

equilibrium quantity

The quantity traded when the quantity supplied of a good, service, or resource equals its quantity demanded.

equilibrium

quantity supplied = quantity demanded Qs = Qd