Chapter 8: Flashcards
What is a price ceiling?
A maximum price is allowed by the law.
What are the five side effects of price ceilings?
- ) shortages
- ) Reductions in product quality
- ) Wasteful lines and other search costs.
- ) A loss of gains from trade.
- ) A misallocation of resources.
What is the effect of a price ceiling below the market price?
Qd>Qs and then a shortage occurs.
How do price ceilings affect quality?
- When producers are capped at certain prices, they often take shortcuts in quality instead of raising the price to help capitalize their financial gains.
What is a wasteful line?
When a product has a price ceiling and there is a shortage of a good, often the producer is bribed by the demander.
What is deadweight loss?
The reduction in surplus caused by a market distortion or inefficiency.
How do price ceilings interact with resources?
It often causes a misallocation of resources in the sense that a price ceiling removes the element of increased demand. So there is no incentive to get goods where their need is more prevalent.
T/F the effect of price controls expands into markets without price controls?
True.
What is rent control?
A price ceiling on rental housing.
Shortages caused by rent controls become more or less severe over time?
More
What is a price floor?
A minimum price allowed by the law.
How does a price floor contribute to a surplus?
An example of this is minimum wage. It creates a price floor that ultimately contributes to a quantity of labor supplied that exceeds that quantity demanded.
- A surplus of labor is known as unemployment
What is Bastian’s cure to unemployment?
Wage set as is with an additional subsidy. This would create an increase in available jobs and available workers. (subsidies assigned of family status.)
