chapter 5

Question 1

general-equilibrium analysis

Answer 1

the analysis of all the economy’s markets simultaneously, recognizing the interactions among the various markets

Question 2

partial-equilibrium analysis

Answer 2

the analysis of a single market in isolation, ignoring any feedbacks that may come from induced changes in the other markets

Question 3

price floor

Answer 3

minimum permissible price that can be charged for a particular good or service

Question 4

when is a price floor binding?

Answer 4

when the price floor is set above the equilibrium; leads to excess supply

Question 5

price ceiling

Answer 5

maximum price at which certain goods and services may be exchanged

Question 6

when is a price ceiling binding?

Answer 6

when the price ceiling is set below the free-market equilibrium price; leads to excess demand

Question 7

how do sellers allocate products in excess demand?

Answer 7

first-come, first-served basis

Question 8

sellers’ preferences

Answer 8

allocation of commodities in excess demand by decisions of the sellers

Question 9

black market

Answer 9

goods are sold at prices that violate a legal price control

Question 10

why do price ceilings create the potential for a black market?

Answer 10

profit can be made by buying at the controlled price and selling at the black-market price

Question 11

why would governments impose price ceilings?

Answer 11

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

Question 12

binding rent controls are a specific case of price (floors/ceilings)

Answer 12

ceilings

Question 13

what are some effects of binding rent controls?

Answer 13

1. there will be a shortage of rental housing
2. alternative allocations schemes (seller’s preference) or gov’t intervention (security-of-tenure laws)
3. appearance of black markets (requiring key money” payment from new tenants)

Question 14

who benefits from rent controls?

Answer 14

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

Question 15

who loses from rent controls?

Answer 15

1. landlords - they don’t get the rate of return the expected on investments
2. potential future tenants - will have to go to further extremes to yoink that housing

Question 16

describe short-run supply of rent-controlled housing accomodations

Answer 16

inelastic; quantity of apartments does not change much

Question 17

describe the long-run supply of rent-controlled housing accomodations

Answer 17

elastic; low incentive to renovate/build new housing bc poor return on investment; housing shortage worsens over time

Question 18

in a market efficiency demand curve, for each unit of a product, the price on the market shows the value __________________

Answer 18

to consumers from consuming that unit

Question 19

in a market efficiency supply curve, for each unit of a product, the price on the on the market shows __________________

Answer 19

the lowest acceptable price to firms for selling a unit; reflects the additional cost to firms from producing that unit

Question 20

economic surplus

Answer 20

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

Question 21

what kind of market will maximize economic surplus?

Answer 21

competitive; it is efficient when price is free to achieve its market-clearing level

Question 22

what leads to market inefficiency in a free and competitive market?

Answer 22

imposition of a binding price ceiling/floor

Question 23

what’s an output quota?

Answer 23

a goal for the production of a good; usually set by gov’t or organization

• can encourage high levels of production
• can restrict production

Question 24

when is partial-equilibrium analysis appropriate?

Answer 24

when the market being examined is small relative to the entire economy

Question 25

what’s the goal of a government price control?

Answer 25

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

Question 26

a price floor leads to excess supply. then what?

Answer 26

the potential sellers are left with quantities that cannot be sold or the government must step in and buy the surplus

Question 27

what does the area below the demand curve signifiy?

Answer 27

overall value that consumers place on that quantity of the product

Question 28

a market’s surplus is maximized when:

Answer 28

the quantity exchanged is determined by the intersection of the demand and supply curves