8 - Government Intervention, Part 1 Flashcards
What is caused by a price floor
A disequilibrium
What is a price floor
Minimum legal price, below which sellers cannot price their goods.
- It only impacts if it is set above the undistorted equilibrium price.
- Price floors help suppliers
- Illegal to set prices below the price floor
Who do price floors help
Price is too low for producers, so price is set above equilibrium
What do price floors cause
They cause an excess supply, as price is set higher
Why might price floors not always work
They can be set too low for consumers, therefore they question quality
What if the demand curve is price elastic or price inelastic during a price floor
Price elastic = Demand curve is flatter, therefore there’s a greater drop in equilibrium output and higher the equilibrium effort cost
Price inelastic = Demand curve will be steeper, therefore there’s a smaller drop in equilibrium output and smaller the equilibrium effort cost
The higher the price is set above equilibrium the higher the ….
Cost
Where do you find consumer surplus and producer surplus on a graph
Consumer surplus = Area under the ordinary demand curve and above the market price
Producer surplus = Are above market supply curve and below the market price. It’s a monetary measure of a producers’ benefit from producing a good at a particular price
What’s deadweight loss
Something that cannot be recovered in an economy and is caused by economic inefficiency
What happens to producer surplus and consumer surplus during a price floor
They both shrink
- No one benefits from this price floor, so assumed government won’t take any further action
What happens to deadweight loss when there’s a price floor
The whole middle is deadweight loss, especially the two nearest segments to the equilibrium, the two furthest could be recovered by for example the government buying the excess supply however if not recovered then it is deadweight loss
What is price ceiling
Legal maximum on the price per unit that a producer can receive
Is there an excess or a shortage in supply when there’s a price ceiling
There is a shortage in supply when the government sets price below the free market price (price ceiling)
- Excess Demand, shortage in supply
- E.g. Rent control
What does a price ceiling do
It is used to be fair, when price is too high, to help consumers you decrease the price
If government takes no further action to a price ceiling, deadweight loss is high (four middle segments on graph) what could do the government do as further action to a price ceiling
Subsidies
