Chapter 4.2 Flashcards
Price controls
The setting of minimum or maximum prices by the government (or private organizations) so that prices are unable to adjust to their equilibrium level determined by demand and supply
What do price controls result in?
Market disequilibrium, causing shortages or surpluses
Price ceiling
A maximum price set below the equilibrium price in order to make goods more affordable for people on low incomes
Consequences for markets of price ceilings
Shortages
Non-price rationing
Underground markets
Underallocation of resources to the good and allocative inefficiency
Negative welfare impacts
Welfare loss
Social surplus or welfare benefits that are lost to society because resources are not allocated efficiently
What does a price ceiling create and how is it shown on a graph?
Welfare loss, shown by Qs < Qe and MB > MC
Consequences for stakeholders of price ceilings
Consumers partly gain and lose
Producers lose
Workers lose
Governments may gain
Price floor
A minimum price set above the equilibrium price in order to provide income support to farmers or to increase the wages of low skilled workers
Consequences for markets of price floors
Surpluses
Government measures to dispose of surpluses
Firm inefficiency
Overallocation of resources to the production of the good and allocative inefficiency
Negative welfare impacts
What does a price floor create and how is it shown on a graph?
Welfare loss, shown by Qs > Qe and MB < MC
Consequences for stakeholders of price floors
Consumers lose
Producers gain
Workers gain
Governments lose
Other countries may lose
Minimum wage
The minimum price of labor that an employer must pay
Consequences of minimum wages for the economy
Labor surplus and unemployment
Illegal workers at wages below the minimum wage
Misallocation of labor resources
Misallocation in product markets
Consequences of minimum wages for stakeholders
Firms lose
Workers gain and lose
Consumers lose
