Chapter 4 - Market applications

Question 1

What is a price ceiling?

Answer 1

It is the maximum legal price a seller may charge for a product or service

Question 2

Why would a price ceiling be applied?

Answer 2

To allow access to products/services to those that otherwise would not be able to afford them. This causes market disequilibrium

Question 3

What are two ways price ceilings have been applied?

Answer 3

Wartime price controls and rent controls

Question 4

What are the problems with price ceilings

Answer 4

More than what is available is demanded, so rationing may need to be applied. This causes another problem in that people are willing to pay more creating a black market.

Question 5

What is a black market?

Answer 5

An illegal market where products are bought and sold at prices above the legal limits.

Question 6

What is a price floor?

Answer 6

A minimum price fixed by government that are above equilibrium prices.

Question 7

What are the two approaches a government may use to cope with the surplus?

Answer 7

1) restrict supplies (quotas) or increase demand (research) or
2) purchase the supply then either store or destroy it.

Question 8

What is the division of burden?

Answer 8

This is applicable when the government places a tax on an item. Price rises by the amount of the tax, which reduces demand, as such part of the increase is paid by the consumer and part is lost revenue to the supplier.

Question 9

If there is inelastic demand and the government implements a tax, who will pay more of the tax?

Answer 9

The consumer will pay more in this instance because a change in price results in a small change in quantity demanded (vertical)

Question 10

If there is elastic demand and the government imposes a tax who will pay/lose the most?

Answer 10

The supplier, because the price change results in a large change to the quantity demanded (horizontal)