Econ 201: Chapter 5
Black Market
A black market is a market in which goods or services are bought and sold illegally-- either because it is illegal to sell them at all or because the prices are legally prohibited by a price ceiling.
License
A license gives its owner the right to supply a good.
Price Ceiling
A maximum price sellers are allowed to charge for a good or service.
Price Floor
A minimum price buyers are required to pay for a good or a service.
Quantity Control (or Quota)
Is an upper limit on the quantity of some good that can be bought or sold.
Price Controls
Legal restrictions on how high or low a market price may go. Price controls take on two forms: Price ceilings and price floors.
Inefficiently Low Quantity
Price ceilings often lead to inefficiency in that goods being offered are inefficiently low quality. Sellers offer low-quality goods at low price even though buyers would prefer a higher quality at a higher price.
Inefficient Allocation to Consumers
Price ceilings often lead to inefficient in allocation to consumers. This is when some people want the good badly and are willing to pay a high price do not get it and some who care relatively little about the good and are only willing to pay a low price do get it.
Wasted Resources
Price ceilings typically lead to inefficiency in the form of wasted resources. People expend money, effort, and time to cope with the shortages caused by the price ceiling.
Inefficient Allocation of Sales among Sellers
Price floors lead to inefficient allocation of sales among sellers. Those who would be willing to sell the good at a lowest price are not always the ones who actually manage to sell it.
Inefficiently High Quality
Price floors often lead to inefficiency in that goods of inefficiently high quality are offered. Sellers offer high-quality goods at a high price, even though buyers would prefer a lower quality at a lower price.
Demand Price
The demand price of a given quantity is the price at which consumers will demand that quantity.
Quota Rent
The difference between the demand and supply price at the quota limit is the quota rent, the earnings that accrue to the license-holder from ownership of the right to sell the good. It is equal to the market price of the license when licenses are traded.
Dead-weight Loss
The loss in a total surplus that occurs whenever an action or a policy reduces the quantity transacted below the efficient market equilibrium quantity.
Minimum Wage
The minimum wage is a legal floor on the wage rate, which is the market price for labor.
Wedge
The quantity control, or quota, drives a wedge between the demand price and the supply price of a good; that is, the price paid by buyers ends up being higher than that received by sellers.
Supply Price
The supply price of a given quantity is the price at which producers will supply that quantity.
Quota Limit
The total amount of a good that can be legally transacted.
