Chapter 5

Question 1

What do voluntary market transactions require?

Answer 1

A willing buyer and a willing seller

Question 2

What determines the amount actually exchanged when quantity demanded is less than quantity supplied?

Answer 2

Demand

Question 3

What determines the amount actually exchanged when quantity demanded exceeds quantity supplied?

Answer 3

Supply

Question 4

What determines the quantity exchanged at disequilibrium?

Answer 4

The lesser quantity demanded and quantity supplied

Question 5

What is a price floor?

Answer 5

A price floor is the minimum permissible price that can be charged for a particular good or service (example on slides 6-7)

Question 6

What does a binding price floor lead to?

Answer 6

It leads to excess supply

Question 7

What are price ceilings?

Answer 7

It is the maximum price

Question 8

What do free markets with flexible prices eliminate?

Answer 8

Excess demand by allowing prices to rise

Question 9

When does another method of allocation need to be adopted?

Answer 9

When there is a binding price ceiling

Question 10

What is first-come, first-served allocation result in?

Answer 10

It is results in buyers waiting in lines, disappointed to discover supplies are exhausted

Question 11

What can first-come, first-served allocation lead to

Answer 11

It can lead to a hidden market (shadow market, black market)

Question 12

What is a hidden market?

Answer 12

It is created when products are sold at prices that violate a legal price control
The idea is to make profit by buying at the controlled price and selling at the (illegal) hidden-market price

Question 13

What are the goals of price ceilings?

Answer 13

1. To restrict production
2. To keep specific prices down
3. To satisfy notions of equity in the consumption of a product that is temporarily in short supply

Question 14

What happens when the price ceiling is high?

Answer 14

The rich people get the product

Question 15

What happens when the price ceiling is low?

Answer 15

The first in line gets the product (those with low value for their time who can wait in line)

Question 16

What are the effects of binding rent controls?

Answer 16

They lead to a shortage of rental housing because quantity demanded exceeds quantity supplied, alternative allocation schemes (ex air b&b), and hidden markets will also appear (ex illegal subletting)

Question 17

What occurs in the long run when binding rent controls are in effect?

Answer 17

Price ceilings lead to a decrease in income for landlords so they are less incentivized to make more apartments to meet the demand so, in the long run, there will be a decrease in the supply of apartments as a consequence of the price ceiling

Question 18

Who gains and who loses when binding rent controls are put in place?

Answer 18

Existing tenants in rent-controlled accommodations are the principal gainers from a policy of rent control
Landlords lose because they do not receive the rate of return they expected on their investments
Potential future tenants also suffer because the rental housing they will require will not exist in the future

Question 19

What does the imposition of controlled prices generate?

Answer 19

It generates benefits for some individuals and costs for others

Question 20

What does the market demand curve for any product show?

Answer 20

It shows how much of that product consumers want to purchase

Question 21

If we turn it around by starting with any given quantity and ask about the price what does the demand curve show us?

Answer 21

It tells us the highest price that people are willing to pay for a given unit

Question 22

What does the market demand curve show us for each unit of a product?

Answer 22

It shows us the value to consumers from consuming that unit

Question 23

What does the market supply curve for any product show?

Answer 23

It shows how much producers want to sell at each possible price

Question 24

If we turn the supply curve around and start with any given quantity and ask about the price, what does the supply curve show us?

Answer 24

It shows us the lowest price that producers are willing to accept for a given unit

Question 25

What does the price on the market supply curve show for each unit of a product?

Answer 25

It shows the lowest acceptable price to firms for selling that unit. This is the lowest acceptable price reflects the additional cost to firms from producing that unit

Question 26

Where is the total economic surplus shown on a graph with a demand curve and supply curve?

Answer 26

Below the demand curve and above the supply curve

Question 27

Where is total economic surplus maximized?

Answer 27

At the free-market equilibrium quantity

Question 28

What do binding price floors in competitive markets lead to?

Answer 28

It leads to a reduction in overall economic surplus and thus to market inefficiency

Question 29

What is the deadweight loss? (slide 23)

Answer 29

It is the overall loss of economic surplus to society of the binding price floor

Question 30

What do binding price ceilings in competitive markets lead to?

Answer 30

It leads to a reduction in overall economic surplus and thus to market inefficiency

Question 31

Why does the government intervene in otherwise free
markets when the outcome is inefficient?

Answer 31

The answer in many situations is that the government
policy is motivated by the desire to help a specific
group of people.
The overall costs are deemed to be a worthwhile price
to pay to achieve the desired effect.

Question 32

What kind of judgements are policy makers making?

Answer 32

They are making normative judgements

Question 33

What is the job of the economist when informing the policy maker of what the right decision might be?

Answer 33

The job of the economist is to undertake positive analysis, emphasizing the actual effects of the policy rather than what might be desirable

Question 34

What other factors must policy makers consider other than the concept of economic surplus?

Answer 34

Social responsibility, which is deemed to be more important to the conduct of society in markets prohibited by law