Microeconomics Ch.5

wedge

"a quantity control, or quota, drives a wedge between the price & the supply price of a good; that is, the price paid by buyers ends up being higher than that received by sellers." -"in every case in which the supply of a good is legally restricted, there is a wedge between the demand price of the quantity transacted and the supply price of the quantity transacted."

what is market intervention, what does it do?

"market intervention [is] a policy imposed by government to prevail over the market forces of supply and demand."

wasted resources

"people expend money, effort, and time to cope with the shortages caused by the price ceiling."

Inefficient allocation to consumers

"people who want the good badly and willing to pay a high price don't get it, and those who care relatively little about the good are only willing to pay a relatively low price do get it"

inefficiency low quality

"sellers offer low quality goods at a low price even though buyers would prefer a higher quality at a higher price."

demand price

"the demand price of a given quantity is the price at which consumers will demand that quantity."

supply price

"the supply price of a given quantity is the price at which producers will supply that quantity.

For what reasons might a government control the market prices?

-Buyers would always like to pay less. ~buyers & sellers might pressure government officials to intervene if they want a price changed, or if they believe something isn't "fair" -gov. might intervene when markets are inefficient, and may impose price controls to move the market towards equilibrium. -gov. might intervene and impose price controls in response to shortages caused by natural disasters, and that "can be justified on the basis of equity and social welfare."

Minimum wage

a legal floor on the wage rate, which is the market price of labor; floor price of labor.

Black Markets

a market where goods/services are bought and sold illegally- either b/c its illegal to sell them at all or b/c the prices charged are legally prohibited by a price ceiling.

what are possible impacts a price ceiling can have when set below the equilibrium price?

a price ceiling set lower than the equilibrium price can result in a shortage, harming the economy since that leads to inefficiency. -price ceilings can also result in a rise of illegal behaviors "as people try to circumvent them."

Quantity control (Quota)

an upper limit on the quantity of a good that can be bought or sold

what is a negative/bad reason for why a quota might be implemented?

for the purpose of enriching the quota holder.

What effect can a price floor have if it's set above the equilibrium price?

if the price floor is set above the equilibrium price, it results in a surplus of goods produced provided by the sellers.

In general, for the most part, black markets are bad & wrong. Although in some cases, they can be somewhat good/beneficial. How?

in some cases, black markets can diminish some of the inefficiency of a price control for a certain product/good. This is b/c the deal makes society better off than if the deal didn't occur.

price control

legal restrictions on how high or low a market price may go; when the government intervenes to regulate prices, it's said to impose price controls. -price controls can either result in a price ceiling or price floor. -price controls can lead to inefficiencies, and the inefficiencies create winners & losers (since some people benefit from price control and some don't)

licenses

licenses give owners the right to supply a good/service Ex: in order to provide taxi cab services, a taxi cab must have a medallion, and the number of taxi cabs with medallions is limited to a specific quantity. Ex: therapists, doctors, and teachers must all have a license to provide their services in the state they wish to practice in.

what is a well known example of a price floor?

minimum wage is an example of a price floor.

what effect can a price floor have if it's set below the equilibrium price?

no negative effects will occur if the price floor was set below the equilibrium price.

Inefficient allocation of sales among sellers

sellers who are willing to sell at the lowest price are unable to make sales while sales go to sellers who are only willing to sell at a higher price.

Quota rent

the difference between the demand and supply price at the quota limit. the earnings that accrue to the license-holder from ownership of the right to sell the good. It's equal to the market price of the license when the licenses are traded.

deadweight loss

the lost surplus associated with the transactions that no longer occur due to the ceiling price; the loss in total surplus that occurs whenever an action or policy reduces the quantity transacted below the efficient market equilibrium quantity. -"deadweight loss is a loss to society- its a reduction in total surplus, a loss in surplus that accrues to no one as a gain."

price ceiling

the maximum price sellers are allowed to charge for a good/service; an upper limit.

price floor

the minimum price buyers are required to pay for a good/service; a lower limit.

what impact will a price ceiling have if it is set above the equilibrium price?

the price ceiling won't have any impact on supply or demand when its set above the equilibrium price.

Quota limit

the total amount of the good that can be legally transacted

when are price ceilings typically imposed?

price ceilings are typically imposed during time of crisis (such as natural disaster, harvest failure, war) b/c these types of events often lead to a sudden increase in price that hurt many people and produce some large "gains" for some few.

what are possible negative outcomes of imposing price ceilings?

-If a price ceiling is set lower than the equilibrium price, it can result in a shortage of the good/service. -The price ceiling can cause a shortage b/c suppliers have less incentive to offer the good/service, so they are not willing to supply as much as they would at the equilibrium price. -Additionally, with this, demand rises for the good/service when the ceiling price is set lower than the equilibrium price, which results in a shortage b/c suppliers don't have as much to offer.

persistent surplus created from a price floor results in missed opportunities & inefficiencies. What ways can price floors create inefficiencies?

-created deadweight loss by reducing the quantity transacted to below the efficient level. (b/c producers can't sell more units of a good than consumers are willing to purchase) -leads to an inefficient allocation of sales among sellers (like price ceiling, floor price can lead to inefficient allocation) -lead to a waste of resources (as well as wasted time & effort) -leads to sellers providing an inefficiently high-quality level (producers are making goods of higher quality & selling them for a higher price. But, consumers would rather have a lower quality good & spend less money)

like price controls, quantity controls can have negative & predictable side effects. What are the negative affects that can occur from quantity controls?

-inefficiency from missed opportunities, resulting in deadweight loss b/c some mutually beneficial transactions do not occur. (generally, as long as the demand price of a given quantity exceeds the supply price, there is a deadweight loss.) -incentive for illegal activities.

what are common results of price ceilings?

-persistent shortage of the good. -inefficiency arising from the persistent shortage in the form of inefficiency low quality (deadweight loss), inefficient allocation of the good to consumers, resources wasted in searching for the good, and the inefficiency low quality of the good offered for sale. -emergence if illegal, black market activity.

what negative side effects can price floors create?

-persistent surplus of goods -"inefficiency arising from the persistent surplus in the for of inefficiently low quantity (deadweight loss), inefficient allocation of sales among sellers, wasted resources, and inefficiently high level of quality offered by suppliers." -temptation to engage in illegal activity, such as bribery and corruption of government officials

for what reasons might a government still impose a price floor, even though they are aware of the potential negative side effects?

-they often disregard the warning about consequences of imposing a price floor -they don't understand the supply & demand model -price floors benefit some sellers.

for what reasons might a government still impose a price ceiling, knowing there are often unpleasant consequences?

-they still benefit some people (and those who do benefit are more vocal than those who are harmed/don't benefit) -some price ceilings have been imposed for a very long time, so some people wouldn't know what to expect of there wasn't a price ceiling, or if the ceiling increased. -Government officials often don't understand supply & demand analysis, so they often aren't aware of the outcomes that could occur from the established ceiling price.

In what ways can price ceilings cause inefficiency?

1) it reduces the quantity of goods/services bought below the efficient level. (and creates deadweight loss) -if price ceilings are set up at a price lower than the market equilibrium price, it reduces the number of goods supplied, and therefore reduces the number of goods bought by consumers. 2) leads to inefficient allocation of goods/services among consumers (meaning those who may really need the good/service may not have access to it b/c someone who doesn't need it has already claimed/purchased it) 3) leads to wasted time & effort as people search for the good/service they want; wasted resources (leads to wasted resources & wasted/missed opportunities) 4) leads to suppliers to maintain the supplies of their good/products in inefficiently low quantities or condition; causes goods to be of inefficiently low quality.

what is a reason for why quotas might be implemented?

A beneficial economic reason quotas may be implemented is to protect certain goods/things that may be impacted by a good/service. ex: quotas have been used to limit the size of a catch of endangered fish stocks, and so the quotas implemented protect endangered fish stocks.

Inefficiently high quality

when sellers offer high-quality goods at a higher price, even though buyers would prefer a lower quality good at a lower price.