Micro Chapter 5 Exam 1

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  1. Government Control Prices
    For whom?
    • for some buyers or sellers who are unpleasant with market equilibrium price
    • ex: too high apartment rent, too low what/rice price
  2. Price Controls
    • Government's legal restrictions on price level
    • price ceiling: maximum price sellers are allowed to charger for g/s
    • price floor: minimum price buyers are quired to pay for g/s
  3. Price Ceilings
    • its typically imposed during crises such as wars, harvest failures or natural disasters
    • Ex: U.S government imposed ceilings on aluminum and steel during WWII
    • Rent control in NY
  4. Price Ceiling
    Image Upload 1
  5. Price Ceilings Cause Inefficincy!
    • Inefficiently low quantity supplied
    • Deadweight loss
    • the loss in total surplus when the quantity is reduced below market equilibrium level by some force
  6. Deadweight Loss and changes in CS, PS
    Image Upload 2
  7. Price Celings Cause Inefficiency!
    • Inefficient allocatio to consumers
    • Some of those w/ higher WTP don't get it, while
    • Some of those w/ lower WTP get it
    • Shortage of supply (excess demand)
    • Needs more time, money and effort to find the low price g/s
    • black market: pay more than ceiling price (even possibly more than the equilibrium price) to get what you want
    • Inefficient low quality
    • Sellers, once enforced by law the charge lower price, optimize its behavior by offering low-qualiy g/s
  8. Then Why Do We Keep Price Ceilings?
    • The power of interest group
    • Ignorance of potential outcome when w/o price control
    • Governments' indifference/ ignorance of market analysis
  9. Price Floors
    • Prices are controlled by government not to fall below a certain level
    • Ex: minimum wage: minimum amount a worker is paid for his/her labor work per unit amount of time
    • price floors on agricultural products
    • Price floors generate side effects
  10. Price Floor
    Image Upload 3
  11. Price Floors Cause Inefficiency!
    • Inefficiently low quantity demanded
    • deadweight loss is created from thedemand quantity reduction
  12. Price Floors Cause Inefficiency!
    • Inefficient allocation of sales among sellers
    • some of those w/ lower production cost may not be able to sell
    • some of those with higher production cost may be able to sell
    • ---> waster of resources
    • Shortage of demand (excess supply)
    • possible underselling to increase sale
    • purchase of the surplus by the government
    • compensation for not to gow by government
    • Inefficiently high quality
    • some sellers may offer too high quality g/s
  13. High Unemployment in Europe is Due to...
    • High minimum wage
    • the persistent surplus in labor supply results in high unemployment
    • and sometimes it results in the unreported "underselling"
    • Other possible reasons
    • Generous unemployment benefits
    • powerful labor unions
  14. Government Controls Quantities
    • Quantity control (or, quota)
    • it limits the maximum quantity of g/s to be transacted
    • ex: taxi medallion system in NY, import quota
    • a license gives its owner the right to supply g/s
    • Demand Price
    • Its the price at which buyers will demand the quantity
    • Supply price
    • its the price at which sellers will supply the quantity
  15. Quantity Control
    • quota drives a wedge b/w the demand price and the supply price of a g/s
    • Pd > Ps
  16. Quota rent
    • = wedge amount
    • its the earnings accruing to the license holder
    • its also equal to the value of the license to be traded
  17. Quantity Controls Cause Inefficiency!
    • Inefficiently low quantity both supplied and demanded
    • Deadweight loss
    • especially, the gain of the license holders at the expense of consumers and the potential sellers w/o the license
    • Incentives for unlawful activities
Card Set
Micro Chapter 5 Exam 1
Price control inefficiency/ quantity control and inefficiency/deadweight loss
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