Ch. 8

Deadweight loss

the fall in total surplus that results from a market distortion.

Under a binding price ceiling, one expects the quality of a good to?

to fall

What happens when the price of discrimination Falls?

The quantity of discrimination demand will increase

What happens at the controlled price?

Buyers cannot buy as much of the good as they would like. Sellers have more customers than they have goods.

When the maximum price that can be legally charged is below the market price, we say that there is a?

Price ceiling

What causes a miss-allocation of scarce resources?

Price controls

Why do many consumers and politicians advocate for a price controls?

Price controls appear to be a straightforward response to the problem of price increases.

When the minimum price that can be legally charged is above the market price we say that there is a?

Price floor

Why do we call price ceiling, price ceiling ?

Prices cannot legally go higher than the ceiling.

On a graph, the rectangle on the left in the middle represents what?

Quality waste

What is the consumer surplus formula if it falls under random allocation?

Quantity supplied times controlled price up to average value

Price ceiling of $10 results in a what?

Shortage of 40 units

What happens when a price ceiling is in effect?

Some mutually beneficial trades between buyers and sellers do not occur.

What areas represent the deadweight loss in the labor market as a result of the imposition of a minimum wage at four dollars?

There is no dead weight loss in this market as a result of the four dollar minimum wage

What is the total value of wasted time?

Time cost per gallon multiplied by a quantity of gallons bought.

Five important effects from price ceilings

1. Shortages 2. Reductions in product quality 3.Wasteful lines and other search costs 4. A loss of gains from trade 5.Missallocation of resources

What are three consequences of controlling prices?

1. Shortages 2.Reduction in quality 3.Wasteful lines

What are the four important affects the price floors create?

1.Surpluses 2.Lost gains from triad (deadweight loss) 3.wasteful increase in quality 4.Misallocation of resources

What are two ways quality can fall?

1.Using low-quality inputs 2.Decreasing services

What is the average value formula?

1/2*highest valued price+1/2*controlled price

What year was the most serious shortage and for what?

1970 for oil

In some sectors of the economy, shortages appeared when prices were controlled in which year?

1971

When did the full-service gasoline station disappear?

1973 with price controls

Who said rent control is the most effective method we know for destroying a city, except for bombing it?

Assad lindbeck

How do price ceilings create shortages?

At the controlled price, the quantity demanded exceeds the quantity supplied, creating a shortage.

What is the total value of units formula?

Average value times units

What is An economy with permanent universal price controls?

Command economy

Blat

Connection and Something to trade

What are the lost gains from trade as a result of the imposition of price floor?

Consumer surplus plus producer surplus

What is the total amount of waste from waiting in line?

Deadweight loss Lost consumer surplus + lost producer surplus

When prices are held below market levels what happens to the quality of the goods?

Declines

What improved the allocation of resources by allowing low-cost, innovative firms to expand nationally?

Deregulation

How is shortage measured?

Difference between quantity demanded at the controlled price and quantity supplied at the control price.

Price controls causes resources to be Misallocated by?

Distorting the signals of the demanders willingness to pay and eliminating the incentives for suppliers to supply

True or false, apartment buildings have more alternatives?

False, apartment building owners have few alternatives therefore the short run supply curve for apartments is inelastic

True or false, in a controlled market goods are not mis allocated ?

False, in a controlled market goods are misallocated

True or false, rent controls do not reduce the price of discrimination?

False, rent controls reduce the price of discrimination

Where is deadweight loss located on a graph?

In front of quality waste

New housing takes some time to build, so rent control creates larger shortages in the What?

Long run than in the short run because long run supply more elastic.

Deregulation of price controls causes what to happen?

Lowered prices, increased quantity, and reduce wasteful quality competition

Maximum price allowed by law

Price ceiling

The sum of consumer and producer surplus is not maximized because the price control prevents mutually profitable gains from trade from being exploited.

Market with a price ceiling

What is a most common example of a price that is controlled above the market level?

Minimum wage

What type of shortages does rent control create in the long run?

Much greater than short run

During the 1970s what caused the world price of oil to increase?

OPEC embargo 1973 Iranian revolution 1979

What is the difference between paying in bribes and paying in time?

Paying in time is much more wasteful

A rent controlled is a regulation that?

Prevents rents from rising to equilibrium levels.

In a free market if all units of the good are allocated to the highest valued then what is the consumer surplus?

The area between the demand curve and the price up to the quantity supplied

Price controls do not illuminate competition, instead they merely change what?

The form of competition

True or false the lower the controlled price is relative to the market equilibrium price, the larger the shortage?

True

True or false, In a market with price ceilings, demanders with the highest willingness to pay have no easy way to signal their demand nor do suppliers have an incentive to supply the demand?

True

True or false, a more realistic assumption is that under price controls, goods are allocated randomly so that a high value use is as likely as low value use to be satisfied?

True

True or false, at the controlled prize the quantity of gasoline demanded is greater than the quantity supplied?

True

True or false, corruption and bribes can be common, especially when price controls are long-lasting?

True

True or false, economist call it a price floor because prices cannot legally go below the floor?

True

True or false, even though small increases in the US minimum-wage won't change much, large increases would cause serious unemployment?

True

True or false, fewer new units are built in the long run?

True

True or false, price ceilings create shortages?

True

True or false, price controls distort signals and a eliminate incentives?

True

True or false, rent control and not the general state of the economy was responsible for the sharp drop in the number of new apartments built in the 1970s

True

Surplus of labor is also known as?

Unemployment

Price floors would create all of the following except? Miss allocation of resources, deadweight loss, surpluses, Wasteful decreases in product quality?

Wasteful decreases in product quality

Is there a difference between paying in bribes and paying in time?

Yes

A price floor is?

a minimum price allowed by law

A legal maximum price at which a good can be sold is a price?

ceiling

How can sellers increase profits when they face a price ceiling?

reduce the quality of the product and provide less customer service