Chapter 5 - Markets in action Flashcards
what is partial-equilibrium analysis
examination of a single market in isolation that ignores feedback effects from other markets
What economists use when they study all markets together
general-equilibrium analysis
Situations where gvt may think about changing equilbrium price (3 ex.)
1) Increase in prices due to natural disaster
2) Minimum wages
3) Shortage of a necessity (like water)
what happens when price set above equilibrium
excess supply (markets don’t clear)
what happens when price set below equilibrium
excess demand (supply shortage)
At a fix price what determines quantity
lesser of quantity demanded and supply (the lowest between these two)
Name of price fixed above equilibrium
price floor
Name of price fixed below equilibrium
price ceiling
Price floor in employment/wage model name
minimum wage
Consequence of minimum wage on firms and employees
Firms are worse off. Have to pay a higher wage than before
Employees that KEEP THE JOB are better off
Employees that are unemployed are worse off (harder to find job)
3 main objectives of imposing a price ceiling (for the gvt)
1) Restrict production
2) Keep specific prices down
3) Satisfy (normative) notions of equity
Black market definition
Situation where goods are sold at prices that violate a legal price control -> this may thwart the objectives of the gvt
What is a binding rent control
Price ceiling imposed by gvt upon landlords on renting price
Ex of 3 consequences of binding rent control
1) Housing shortage (excess demand)
2) Alternative allocation schemes in black market
3) Illegal schemes like ‘‘key money’’ or others
Consequence of binding rent control on tenants and landlords
Landlords lose
Tenants in rent-controllend apartment win
Potential tenants suffer
Short run and long run effects of rent controls
Perfectly inelastic (vertical) curve for supply in short run. In long run, supply curve becomes more elastic
2 Alternatives for housing shortages for the gvt
1) Subsidizing (financially support) housing production or producing public housing directly
2) Provide lower-income households with income assistance
Something to remember about all gvt policies
Always involve a resource cost
When using the concept of market efficiency, demand is represented as _________ and supply is represented as _______
value. cost.
Price corresponding to a sepcific qt demanded : what does it mean
Highest price consumers are willing to pay (as shown by height of the demand curve)
Price corresponding to a specific qt supplied : what does it mean
Lowest price producers are willing to accept
What demande curve means from POV of market efficiency
for each unit, price on demand curve shows value consumers get from buying it
What supply curve means from POV of market efficiency
for each unit, price on supply curve shows additional cost for producer of producing that extra unit
Economic surplus def
Difference between value given to a product and how much is paid for it
Economic surplus synonym/other way of defining it
satisfaction you get from a product
When do we stop buying/what determines equilibrium price
We stop buying at point where willingness to pay = price
What is to remember about consumers and the demand curve (in market efficiency concept)
For all prices on demande curve, a consumer is willing to pay this price
T/F consumers that are willing to pay a price that is lower than eq. price won’t get the product
F : There will be producers that are willing to sell it at the price they are willing to pay
Market efficiency and supply curve : trick for understanding producer surplus
Each unit supplied comes from a producer that was willing to sell it at this price. Producer surplus (total) is sum of all Eq producers surplus
Market efficiency and demand curve : trick for understanding consumer surplus
Each unit bought is bought by a consumer that was willing to pay this price for it. Consumer surplus (total) is sum of all Eq consumers surplus
Total economic surplus equation
Producer surplus + consumer surplus
When is economic surplus maximized and what do we call that
Economic surplus is maximized at the competitive equilibrium level of output. We say that the market is efficient
Things that can influence economic surplus and what the situation is called
Price floors, price ceilings and quotas. Market inefficiency
What is called the lost economic surplus in Price floors, price ceilings and quotas ?
Deadweight loss of … (price floor, price ceiling or output quota)
In situation with taxes, what is the region at the left of the curve that is taken by the tax
Government revenue
Governement intervention in competitive markets : First visible effects
Redistribution of surplus between buyers/sellers but overall losses
Governement intervention in competitive markets motivation if overall losses
Looking to help specific groups
Attitude of economists with gvt intervention
Must determine actual (economic) effects of policies rather than what is the best political decision (for a particular group)
