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
