Chapter 5 - Markets in action

Question 1

what is partial-equilibrium analysis

Answer 1

examination of a single market in isolation that ignores feedback effects from other markets

Question 2

What economists use when they study all markets together

Answer 2

general-equilibrium analysis

Question 3

Situations where gvt may think about changing equilbrium price (3 ex.)

Answer 3

1) Increase in prices due to natural disaster
2) Minimum wages
3) Shortage of a necessity (like water)

Question 4

what happens when price set above equilibrium

Answer 4

excess supply (markets don’t clear)

Question 5

what happens when price set below equilibrium

Answer 5

excess demand (supply shortage)

Question 6

At a fix price what determines quantity

Answer 6

lesser of quantity demanded and supply (the lowest between these two)

Question 7

Name of price fixed above equilibrium

Answer 7

price floor

Question 8

Name of price fixed below equilibrium

Answer 8

price ceiling

Question 9

Price floor in employment/wage model name

Answer 9

minimum wage

Question 10

Consequence of minimum wage on firms and employees

Answer 10

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)

Question 11

3 main objectives of imposing a price ceiling (for the gvt)

Answer 11

1) Restrict production
2) Keep specific prices down
3) Satisfy (normative) notions of equity

Question 12

Black market definition

Answer 12

Situation where goods are sold at prices that violate a legal price control -> this may thwart the objectives of the gvt

Question 13

What is a binding rent control

Answer 13

Price ceiling imposed by gvt upon landlords on renting price

Question 14

Ex of 3 consequences of binding rent control

Answer 14

1) Housing shortage (excess demand)
2) Alternative allocation schemes in black market
3) Illegal schemes like ‘‘key money’’ or others

Question 15

Consequence of binding rent control on tenants and landlords

Answer 15

Landlords lose
Tenants in rent-controllend apartment win
Potential tenants suffer

Question 16

Short run and long run effects of rent controls

Answer 16

Perfectly inelastic (vertical) curve for supply in short run. In long run, supply curve becomes more elastic

Question 17

2 Alternatives for housing shortages for the gvt

Answer 17

1) Subsidizing (financially support) housing production or producing public housing directly
2) Provide lower-income households with income assistance

Question 18

Something to remember about all gvt policies

Answer 18

Always involve a resource cost

Question 19

When using the concept of market efficiency, demand is represented as _________ and supply is represented as _______

Answer 19

value. cost.

Question 20

Price corresponding to a sepcific qt demanded : what does it mean

Answer 20

Highest price consumers are willing to pay (as shown by height of the demand curve)

Question 21

Price corresponding to a specific qt supplied : what does it mean

Answer 21

Lowest price producers are willing to accept

Question 22

What demande curve means from POV of market efficiency

Answer 22

for each unit, price on demand curve shows value consumers get from buying it

Question 23

What supply curve means from POV of market efficiency

Answer 23

for each unit, price on supply curve shows additional cost for producer of producing that extra unit

Question 24

Economic surplus def

Answer 24

Difference between value given to a product and how much is paid for it

Question 25

Economic surplus synonym/other way of defining it

Answer 25

satisfaction you get from a product

Question 26

When do we stop buying/what determines equilibrium price

Answer 26

We stop buying at point where willingness to pay = price

Question 27

What is to remember about consumers and the demand curve (in market efficiency concept)

Answer 27

For all prices on demande curve, a consumer is willing to pay this price

Question 28

T/F consumers that are willing to pay a price that is lower than eq. price won't get the product

Answer 28

F : There will be producers that are willing to sell it at the price they are willing to pay

Question 29

Market efficiency and supply curve : trick for understanding producer surplus

Answer 29

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

Question 30

Market efficiency and demand curve : trick for understanding consumer surplus

Answer 30

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

Question 31

Total economic surplus equation

Answer 31

Producer surplus + consumer surplus

Question 32

When is economic surplus maximized and what do we call that

Answer 32

Economic surplus is maximized at the competitive equilibrium level of output. We say that the market is efficient

Question 33

Things that can influence economic surplus and what the situation is called

Answer 33

Price floors, price ceilings and quotas. Market inefficiency

Question 34

What is called the lost economic surplus in Price floors, price ceilings and quotas ?

Answer 34

Deadweight loss of ... (price floor, price ceiling or output quota)

Question 35

In situation with taxes, what is the region at the left of the curve that is taken by the tax

Answer 35

Government revenue

Question 36

Governement intervention in competitive markets : First visible effects

Answer 36

Redistribution of surplus between buyers/sellers but overall losses

Question 37

Governement intervention in competitive markets motivation if overall losses

Answer 37

Looking to help specific groups

Question 38

Attitude of economists with gvt intervention

Answer 38

Must determine actual (economic) effects of policies rather than what is the best political decision (for a particular group)