EC201 Ch. 6

price ceiling

a maximum price set by the government

the demand curve

each point on the demand curve shows the buyer's willingness to pay, the maximum amount a consumer is willing to pay for a product.

the supply curve

each point on the supply curve represents the seller's willingness to accept, the minimum amount a producer is willing to accept as payment for a product; equal to the marginal cost of production

winners

firms that receive a free medallion

market equilibrium

generates the highest possible total surplus, i.e., the sum of consumer surplus and producer surplus

government intervention in efficient markets

gov't may intervene in cases of market failure. this is a situation in which a market fails to be efficient because of external benefits, external costs, imperfect information, or imperfect competition.

licensing

limits the number of firms in the industry and thus restricts the quantity

producer surplus

the price a producer receives for a product minus the marginal cost of production

maximum prices

-the gov't sets max prices (price ceilings) in markets like rental housing, gasoline, and medical care. -increases quantity demanded and reduce quantity supplied -max price will cause excess demand and reduce total surplus of the market

other inefficiencies to rent control:

1.) a drop in the quantity supplied of housing, particularly in the long run, because some of the original supplies of apartments can no longer cover costs at the lower price; the quality of apartments may deteriorate 2.) consumers will spend extra time searching for apartments 3.) cheating or other methods may emerge to avoid price control, such as bribery or "key money" (nonrefundable security deposits). the money price of apartments may be lower, but the price actually paid by tenants may rise when opportunity costs are added in.

price floor

a minimum price set by the government

the total burden of the tax exceeds the revenue generated by the tax

because a tax causes people to change their behavior

losers from licensing

the consumers, who pay higher prices for a lower quantity

market consumer surplus

the sum of the consumer surplus for each consumer

efficiency

a situation in which people do the best they can, given their limited resources. A market equilibrium will generate the largest possible surplus and be efficient if the following conditions are met: -no external benefits -no external costs -perfect information -perfect competition

a tax on a good will be shifted forward onto consumers (the price of a product will rise)

and backward onto input suppliers (firms will receive a lower price and will reduce the quantity which while negatively affect input suppliers.)

total surplus is lower at a maximum price below the equilibrium price

because some mutually beneficial transactions do not take place. In other words, some sellers could find buyers who would be willing to pay a higher price than the max price (quantity demanded would exceed quantity supplied).

total surplus is lower at a minimum price above the equilibrium price

because some mutually beneficial transactions do not take place. some sellers could find buyers who would be willing to pay more than the marginal cost but less than minimum price (quantity demanded < quantity supplied)

medallion policy

increases the price and decreases the quantity of taxi services

efficiency and the invisible hand

individual actions of buyers and sellers, each acting in his or her self-interest, will bring the market to equilibrium and maximize the total surplus in the market

rent controls

specify the max rent that can be charged and have been used in many large cities. Rent control generates a deadweight loss.

consumer surplus

the amount a consumer is willing to pay for a product minus the price the consumer actually pays

deadweight loss

the decrease in total surplus of the market that results from a policy such as rent control (as long as the max price is set below the equilibrium)

deadweight loss from taxation

the difference between total burden of a tax and the amount of revenue collected by the government.

price-supported program

the government sets a legal min. price and then buys any resulting surpluses. farmers benefit little from price supports.

minimum prices

the government sets minimum prices, particularly in agricultural markets

market producer surplus

the sum of the producer surplus to each firm