Chapter 4 EQUILIBRIUM PRICE CEILING AND PRICE FLOORS: micro Exam 1 study guide

For a market to reach equilibrium what conditions need to be met

1. Consumers need info about different supplies prices so that they can choose between the lowest price for the good they want to buy 2. Firms must be able to monitor inventories. Rising inventories indicate that the price is too high, falling inventories indicate that the price is too low 3. Firms must be able to change the price of their good, t adjust it toward the equilibrium price

when the price is too low what is there

A shortage

shortage

A situation in which quantity demanded is greater than quantity supplied at the current market price.

When the price is too high what is there

A surplus

When a price floor is imposed on the market it is binding only of it is ______ the equilibrium price

Above

Revenue equation for taxes

Amount of the tax multipled by the quantity trades

you observe that the price in the market has gone up and the quantity has gone up this must have been a result in

An increase in demand

When consumers and producers interact with each other what does the market do

Balances the desires of the sellers

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

Binding

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

Binding price ceiling

price ceiling set below equilibrium price

Binding price ceilings because it prevents the price from rising to its equilibrium level

An increase or decease in quantity demanded of a good or service or resource at every price

Change in demand

An increase or decrease in the quantity supplied of a good service or resource at every price

Change in supply

A decrease in demand will do what to price and quantity

Decrease both price and quantity

An increase in supply will do what to price and quantity

Decrease both the price and quantity

What is the role of the government in market economies

Defining and enforcing property rights, determines the rules of commerce, enforcing contracts, and punishing dishonest behavior

Either way too much or way too little is produced

Disequilibrium

A tax ion demand shifts the curve _____

Down

When quantity demanded equals quantity supplied, and the quantity of goods and services traded is maximized

Equilibrium price

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

Equilibrium quantity

What is shortage also known as

Excess demand

What is a surplus also known as

Excess supply

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

Excise tax

Surpluses will cause market prices to ____

Fall

When a good or service it taxed the overall price paid by consumers raises and price received by producers ______

Falls

Because the price is lower than the equilibrium price the quantity demanded rises and the quantity supplied _______ resulting in a _____ of goods

Falls Shortage

An increase in demand will do what to price and quantity

Increase both the price and quantity

A decrease in supply will do what to price and quantity

Increase the price and decrease the quantity

What is a consequence of price floors

Informal labor markets

When a price ceiling is imposed on a market it is binding only if ____ the equilibrium price

It's below

When market price is above equilibrium price, market forces try to drive it _____

Lower

Policies such as price floors are designed to make sure that sellers receive a _____ price that is greater than what would be available at the market equilibrium

Minimum

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

Minimum wage

What is the most common form of a price floor

Minimum wage

A maximum legal price that is set above the existing equilibrium price because market equilibrium price is lower than the price ceiling, the circling has no effect on the market and is said to be non binding

Non binding price ceiling

A price ceiling that is set above the equilibrium price is called a _______ because it has no effect on the market

Non binding price ceiling

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

Non binding price floor

A characteristic of demand for a good or service or resource other than its own market price.

Non price determinant (demand)

A characteristic of supply of a good or service other than its own market price

Non price determinant supply

When the demand and supply curve shift at the same time what will we be able to determine

Only the effect on price or the effect on quantity or both

A maximum legal price at which a good can be sold

Price ceiling

What are persistent shortages results of

Price ceilings

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

Price floor

What does the government do when it wants to prevent the market from establishing an equilibrium price

Price floors Price ceilings

If there is a simultaneously an increase in demand and an increase in supply, we would expect

Price will rise but effect on quantity cannot be determined

Taxes are imposed to do one of two things

Raise revenue to fund government activities or discourage people from consuming a particular good or service

Shortages will cause market prices to ____

Rise

A situation in which the quantity supplied is greater than the quantity demanded at the current market price

Surplus

The size of the tax affects the amount of _______ collected

Tax revenue

What does the law of demand state

That there is a negative relationship between the price of so god and the quantity demanded all else held constant

A tax just increases what

The costs a firm must recover when it sells the good

What is the result of a change in demand or a change in supply

The equilibrium price and equilibrium quantity will change

The price that balances demand and supply is called what

The equlibrium price

What are shortages and surpluses represented by

The horizontal distance between the quantity demanded and the quantity supplied

When a market is in equlibrium the price that consumers pay and and the price that producers receive exactly balances what

The marginal benefit and marginal cost of consuming and producing a product

What is the equilibrium price also known as

The market clearing price

What is the primary determinant of the quantity demanded by consumers

The price of a good or service

Suppose the market has a surplus, 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

In equilibrium the what is equal to the what

The quantity demanded is equal to the quantity supplied

What does a non price determinant change

The relationship between price and quantity demanded

What does the law of supply state?

There is a positive relationship between the price of a good and the quantity supplied all else held constant

What do taxes not do

They do not change the cost of resources, the number of firms, or any other non price determinants of supply

When demand increases what happens to the equilibrium price and quantity

They increase

A tax on suppliers shifts the curve ______

Up

When are shortages and surpluses eliminated

When prices are flexible

When does a shortage exist

When the quantity supplied is bigger than the quantity demanded

When does a surplus exist?

When the quantity supplied is bigger than the quantity demanded at a given price Qs>Qd