chapter 3 Flashcards
increase in demand and increase in supply results in
increase in price from D
decrease in price from S
and an increase in quantity traded from both
p can either increase decrease or stay the same depending on what’s going on
increase in demand (p and Q)
increase in price
increase quantity traded
decrease in demand
decreases price and decreases quantity traded
increase in supply
decreases price, increases quantity traded
decreases in supply
increase in price , decrease in quantity traded
what happens when there’s an increase in demand and decrease in supply
increase in price from D
increase in price form S
Increase in Q from D
decrease in Q from S
therefore q traded is unclear but the price will definitely increase
what happens when there’s a decrease in demand and increase in supply
decrease in price form D
decrease in price from S
decrease in Q from D
increase in Q from S
therefore the quantity is unclear but the price will definitely decrease
what happens if supply and demand both decrease
decrease in Q from S
decrease in Q from S
increase in price from S
decrease in price from D
price unclear but the quantity would definitely decrease
what is an effective price floor that prevents equilibrium form being met?
must be above equilibrium, the floor only keeps the price from dropping (therefore the price would not naturally drop below eq’m)
what is a price floor
govt imposed minimum price that can be paid for something (minimum wage) – creates shortage, at a lower price, suppliers will want to produce less but consumers will want more
- price must be above equilibrium
- govt is assisting producers
who is govt assisting with price floor
producers,
so people who are selling themselves for labour ;)
or farmers
minimum wage definition
the lowest legal rate of pay per hour for workers set by govt
graph of minimum wage: what do supply and demand curves represent
the demand curve represents companies wanting to buy labour, it is inversely related, the higher the price of labour the less people they want to hire.
the supply curve represents people they sell their labour. the higher the prices paid the more people want to work
price floor and minimum wage what is happening/what is the result
- govt imposes price floor when minimum wage or equilibrium is too low. (not a living wage)
- the price floor will be imposed above equilibrium, this will result in a decrease in demand for workers from companies because of the price increase, however there will be in increase in quantity supplied by workers because more workers will be willing to work there at higher wages.
- this results in a surplus, at a higher minimum wage than equilibrium you have more workers than there are jobs for (than companies can afford to hire)
illegal market price and price floor (minimum wage)
since there is a surplus there are people willing to work for less just to have a job
the illegal market price is on the supply graph it shows the price at which the quantity traded (quantity of hired people) are actually willing to work.
price controls
govt regulations to set either a max or min price of a product
price ceiling
a govt regulated max price that can be charged for a product
-done when govt deems that price of product (usually a necessity) is too high - like rent
rent control
govt regulation making it illegal to rent out accommodation above the stipulated or price ceiling level
how are price ceilings effective?
they must be below equilibrium
what happens when there is a price ceiling to supply and demand
the lower price, say in rent decreases the quantity supplied, but it increases the quantity demanded this leads to a shortage.
not as many people will be able (to produce say rental units at such a low price so the quantity supplied will decrease, but more people will be able to afford it so the quantity demanded will increase)
what is the illegal selling price
when there is a decrease in supply (resulting from a price ceiling), naturally the price would rise, but since this is illegal there will be an illegal selling price and this is the real price (above the ceiling) that people are willing a that quantity
price ceiling creates–blank— which results in– (2 ways)
shortage which results in an allocation of goods in two ways:
producers preference: sellers determine who they sell to based on their own preverences
or
rationing: products allocated using coupons issued by govt guaranteeing a certain quantity of something per person/family unit
what is a quota
limits supply of a product, this increases and stablizes revenue for product (usually a farm product)
-since quantity decreases the demand is high and therefore the price increases, to find how much this product is selling at check the demand curve at the quota quantity, it will be higher than eq’m price
what does a tax do to supply and demand
a tax shifts the supply curve vertically, this decreases the amount of consumption-QD because the product costs more, and therefore decreases the amount produced
immediately after a price increase, the same amount is produced but there is a surplus because less people are buying , this pushes price down to a new eq’m
