CH5 - Price Controls and Market Efficiency Flashcards
How is quantity exchanged determined when in disequilibrium?
For any price below p0, q exchanged is determined by supply curve
For any price above p0, q exchanged is determined by demand curve
What is a price floor?
minimum permissible price that can be charged for a particular good/service
When is a price floor binding?
No effect if set at/below eq, bc free market equilibrium remains attainable
Binding if set above equilibrium bc raises prices
Lead to excess supply, so either unsold surplus will exist, or someone (gvt) must enter and buy excess
What is a price ceiling?
Max price at which certain goods and services may be legally exchanged
When is a price ceiling binding?
If sat above Eq, no effects bc Eq is still attainable
If sat below, lower prices and it is binding → excess demand, Q exchanged will be lesser than in free market equilibrium, profileration of hidden markets
What is the link between minimum wage and unemployment?
When there is a minimum wage, it is the equivalent of a price floor and thus there is a reduction in the level of employment and an increase in quantity supplied of labour services
=> unemployment in competitive market
What is seller’s preference?
Allocation of products in excess demand by decision of the sellers
What is a hidden market, and when do they appear?
Any market in which transactions (which are themselves legal) take place at prices that violate a legal price control.
Binding price ceilings always create the potential for hidden market because a profit can be made by buying at the controlled price and selling at the (illegal) hidden-market price.
What are 3 goals when imposing price ceilings?
- Restrict production
- Keep specific prices down
- Satisfy notions of equity in the consumption of a product temporarily in short supply - Will only be purchased by those who can afford the high hidden market prices
What are the predicted effects of rent control?
- Shortage of rental housing bc Qd>Qs
- Alternative allocation schemes from landlords, or gvt intervention by security-of-tenure laws
- Hidden market, ie key money in diff between free market and controlled prices
How is elasticity affected when it comes to rent control?
It is applied on a highly durable product providing services to consumers for long periods
Short run: limited, quite inelastic supply-curve so only slight shortage in beginning
Long run: highly elastic
who gains and who loses from rent control?
Existing tenants are principal gainers from rent control
Landlords suffer bc less of return on investments + future tenants bc less supply to meet their demands
What is economic surplus?
Net value society as a whole receives by producing and consuming a good
For any given quantity of a product, the area below the demand curve and above the supply curve shows the economic surplus associated with the production and consumption of that product
When can you say the market for a specific product is efficient?
You can say that a market for any specific product is efficient if the quantity of the product produced/consumed is such that the economic surplus in market is maximised (total surplus)
