chapter 5 Flashcards
general-equilibrium analysis
the analysis of all the economy’s markets simultaneously, recognizing the interactions among the various markets
partial-equilibrium analysis
the analysis of a single market in isolation, ignoring any feedbacks that may come from induced changes in the other markets
price floor
minimum permissible price that can be charged for a particular good or service
when is a price floor binding?
when the price floor is set above the equilibrium; leads to excess supply
price ceiling
maximum price at which certain goods and services may be exchanged
when is a price ceiling binding?
when the price ceiling is set below the free-market equilibrium price; leads to excess demand
how do sellers allocate products in excess demand?
first-come, first-served basis
sellers’ preferences
allocation of commodities in excess demand by decisions of the sellers
black market
goods are sold at prices that violate a legal price control
why do price ceilings create the potential for a black market?
profit can be made by buying at the controlled price and selling at the black-market price
why would governments impose price ceilings?
- restrict production
- keep specific prices down
- to satisfy notions of equity in the consumption of a product that is temporarily in short supply
binding rent controls are a specific case of price (floors/ceilings)
ceilings
what are some effects of binding rent controls?
- there will be a shortage of rental housing
- alternative allocations schemes (seller’s preference) or gov’t intervention (security-of-tenure laws)
- appearance of black markets (requiring key money” payment from new tenants)
who benefits from rent controls?
existing tenants - as the gap between the controlled and free-market rents grows, and as the stock of available housing falls, those lucky enough to stay put benefit
who loses from rent controls?
- landlords - they don’t get the rate of return the expected on investments
- potential future tenants - will have to go to further extremes to yoink that housing
describe short-run supply of rent-controlled housing accomodations
inelastic; quantity of apartments does not change much
describe the long-run supply of rent-controlled housing accomodations
elastic; low incentive to renovate/build new housing bc poor return on investment; housing shortage worsens over time
in a market efficiency demand curve, for each unit of a product, the price on the market shows the value __________________
to consumers from consuming that unit
in a market efficiency supply curve, for each unit of a product, the price on the on the market shows __________________
the lowest acceptable price to firms for selling a unit; reflects the additional cost to firms from producing that unit
economic surplus
difference between value to consumers and additional costs to firms (below demand curve and above the supply curve); represents the net value that society as a whole receives by producing and consuming the product
what kind of market will maximize economic surplus?
competitive; it is efficient when price is free to achieve its market-clearing level
what leads to market inefficiency in a free and competitive market?
imposition of a binding price ceiling/floor
what’s an output quota?
a goal for the production of a good; usually set by gov’t or organization
- can encourage high levels of production
- can restrict production
when is partial-equilibrium analysis appropriate?
when the market being examined is small relative to the entire economy
what’s the goal of a government price control?
to hold the price of some good or service at some disequilibrium value that could not be maintained in the absence of the government’s intervention
a price floor leads to excess supply. then what?
the potential sellers are left with quantities that cannot be sold or the government must step in and buy the surplus
what does the area below the demand curve signifiy?
overall value that consumers place on that quantity of the product
a market’s surplus is maximized when:
the quantity exchanged is determined by the intersection of the demand and supply curves
