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Econ 101: *My notes > Econ 101 Chapter 6 > Flashcards

Econ 101 Chapter 6 Flashcards

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1
Q

Price ceiling or Price cap

A

A government regulation that makes it illegal to charge a price higher than a specified level

  • The effects of a price ceiling depends on if it’s above market equilibrium or below
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2
Q

If the price ceiling is set above the equilibrium

A
  • It has no effect
  • It does not constrain market activity (*It’s like saying “you can’t charge more than this,” but everyone is already charging less anyway. So, it doesn’t really do anything at that moment).
  • Remember to show on graph
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3
Q

If the price ceiling is set below the equilibrium

A
  • Has powerful effects on the market
  • The price ceiling prevents the price from regulating quantity demanded/supplied. (*Doesn’t allow market equillberum QD=QS)
  • Remember to show on graph
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4
Q

What’s rent ceiling

A
  • When a price ceiling is applied to the housing market
  • Rent ceiling only focuses on the rent portion of housing.
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5
Q

What does a rent ceiling set below create?

A
  • A housing shortage
  • Increased search activity
  • A black market
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6
Q

What’s a housing shortage?

A
  • When quantity demanded exceeds what’s supplied.
  • Creates an allocation problem to frustrated demanders creating “Increased search activity”.
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7
Q

Whats search activity

A
  • Time spent looking to do business with someone
  • Spend time looking at alternatives before making a choice
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8
Q

Increased Search activity

A
  • Frustrated people who want a place to live will race to get a place (*In terms of search activity)
  • The opportunity cost of renting a place includes the price and the time it takes to find a place to rent. (*It’s the idea of what you could’ve done with your time and money as search activity is costly)
  • Search activity can also include prices of other products such as gasoline
  • Might make the full cost of housing higher than it would be without a rent ceiling
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9
Q

A black market

A
  • An illegal market that price exceeds the price ceiling in rent controlled housing.
  • A rent might add additional costs to renting (*Depending on the level of control in the market)
  • Loose enforcement = black market rent is close
  • Strict enforcement = Rent is equal to max price renter is willing to pay. (Or how much the search costs, black market costs)
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10
Q

Inefficiency of a rent ceiling

A
  • Inefficient underproduction of housing
  • Marginal social benefit of housing exceeds marginal social cost and a deadweight loss shrinks the producer surplus and consumer surplus
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11
Q

What’s the full loss from a rent ceiling?

A

the sum of the deadweight loss + increased cost of search

(Look at graph in notebook) or Page 133

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12
Q

Price floor

A
  • A government regulation that makes it illegal to charge a price lower than a specified level
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13
Q

Price floor set below equilibrium price

A

Has no effect / Does not constrain market forces

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14
Q

Price floor set above equilibrium price

A

Prevent the price from regulating the quantities demanded and supplied

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15
Q

What is it called when a price floor is applied to labour market

A
  • Minimum wage
  • Minimum wage imposed at certain levels can create unemployment.
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16
Q

If minimum wage is above Equilibrium rate what happens?

A
  • The quantity of labor exceeds the labor demanded resulting in a surplus of labor.
  • Minimum wage imposed at the level above equilibrium wage creates unemployment (*Whats between QD and QS= unemployment)
  • Quantity of labour exceeds the quantity of labour demanded (labour surplus)
  • Demand for employment is based on level of employment and surplus of labor that is unemployed.
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17
Q

What’s the labour market’s QD/QS represent?

A
  • The supply curve is the supply a worker is supplying his/hers labor
  • The demand measures the demand/need of the labor itself
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18
Q

Whats the OC of supplying labor

A

Leisure foregone

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19
Q

Why is an unregulated labour market regarded as efficient?

A

unregulated labour market allocates the economy’s scarce labour resources to the jobs in which they are valued most highly. (*Ppl do what they can do best)

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20
Q

what does minimum wage do the market?

A
  1. Creates unemployment
  2. Increased job search
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21
Q

why is minimum wage inefficient

A

due to the surplus, a deadweight loss arises, potential loss from increased job search is borne by workers

full loss of minimum wage = deadweight loss + increased cost of job search

(*Understand graph on pg137)- Ask Tracy

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22
Q

What are the 2 prices when a transaction is taxed?

A
  1. price that includes tax - buyers respond
  2. price that exclude tax - sellers respond
23
Q

Tax incidence?

A

Divison of the burden of tax between buyers & sellers.

24
Q

Who does the burden fall on when the price paid by buyers rises by the full amount of the tax, by a lesser amount, or not at all (*Tax incidence)

A

price paid by buyers rises by the full amount of tax, the burden of tax falls entirely on the buyers

price paid by buyers rises by a lesser amount than the tax, then burden falls partly on buyers + sellers

price paid by buyers does not change at all, the burden of tax falls entirely on sellers

(*Confused why)

25
Q

Tax on sellers? What does this mean,

A
  • Is like an increase in cost so it decreases supply
26
Q

How to find supply/demand curves (with taxes position)?

A
  • supply curve + Tax on sellers (Supply curve)
  • Demand curve- Tax on buyers (demand curve)

*Go over with Tracy (SLIDESHOW)

27
Q

why are taxes inefficient?

A

leads to underproduction as MSB>MSC

shrinks producer + consumer surplus + creates deadweight loss

28
Q

A tax as a wedge

A
  • Same effect has happened (supply decreased, price increase and price sellers recieve)

Tax is a wedge driven by price buyers pay and price sellers get.

  • Tax creates wedges and equillberum quantity is no longer at the intersection of demand and supply.
29
Q

why are taxes inefficient?

A

leads to underproduction as MSB>MSC (Price measures willingness which is MSB, price sellers are willing to recieve, MSC)

shrinks producer + consumer surplus + creates deadweight loss

30
Q

What is the idea behind the Tax incidence of elasticity of Demand?

A

The division between buyers and sellers depend on eslaticity of supply/demand

31
Q

What is perfectly inelastic demand?

A
  • The buyer pays the tax
32
Q

What about perfectly elstaic demand?

A

The seller pays the entire tax

33
Q

describe what happens when there is perfectly inelastic demand + tax incidence?

A

buyers pay for the tax

as equilibrium quantity doesn’t change, there’s no underproduction + no deadweight loss from the tax when demand is perfectly inelastic

34
Q

Explain insulin as an example of perfectly inelastic demand

A
  • Insulin’s demand is consistent becasue it’s a needed item for those who are diabetic.
  • If taxed the buyer would pay the burden.
35
Q

What happens there’s perfectly elastic demand + tax incidence?

A

sellers pay for the tax

equilibrium quantity decreases, there is underproduction + deadweight loss

36
Q

describe the relationship between deadweight loss + elasticity of demand

A

deadweight loss increases as elasticity of demand increases.

there’s no deadweight loss when demand is perfectly inelastic

deadweight loss is at its largest when demand is perfectly elastic

37
Q

Tax incidence of supply

A

Shows the elasticity of supply and the division between buyers and sellers.

38
Q

Perfectly inelastic supply

A

Sellers pay

39
Q

Perfectly elastic supply

A

Buyers pay

40
Q

what happens when there’s perfectly inelastic supply + tax incidence?

A

sellers pay the tax

equilibrium quantity stays constant, there’s no underproduction + no deadweight loss arising from tax

41
Q

what happens when there is perfectly elastic supply + tax incidence?

A

buyers pay the tax

equilibrium quantity decreases, there’s underproduction + deadweight loss arises

42
Q

describe the relationship between deadweight loss + elasticity of supply

A

as the elasticity of supply becomes more elastic, the deadweight loss increases - there’s no deadweight loss when supply is perfectly inelastic + deadweight loss is largest when supply is perfectly elastic

43
Q

What two systems to economists propose to apply fairness to a tax system?

A
  • The benefits principle
  • The ability-to-pay principal
44
Q

What’s the benefit principal

A
  • The idea that people pay taxes equal to benefit receive from services provided from govy
45
Q

Why is principal benefits fair?

A
  • The arrangement is fair because those that benefit must pay the most taxes.
46
Q

what’s the The ability-to-pay principal?

A

The idea that people pay according to how easily they can bear/pay the burden of tax

  • Reinforces the ability-to-pay principle can reinforce the benefits principle to justify high rates of income tax on high incomes
47
Q

How is the - The ability-to-pay principal fair?

A

A rich person can pay more because they can.

48
Q

What two methods do a government use to intervene in markets for farm products?

A
  • Production quotas
  • Subsidies
49
Q

What are production quotas?

A

The upper limit to the quantity of a good that may be produced during a specific period.

50
Q

What’s a subsidy/Equaation

A
  • A payment to producer by a govy.
  • S-subsitdy payment
51
Q

What if production quotas is set above?

A
  • Nothing would change
52
Q

What if production quotas is set below?

A
  • Decrease in supply
  • A rise in price
  • Decrease in marginal cost (*How much does it cost to make one more of something)
  • Inefficient production
  • An incentive to cheat and over produce
  • MSB>MSC (*Underproduction)
53
Q

What are the effects of subsidy?

A
  • An increase in supply
  • A fall in price and increase in quantity produced
  • An increase in marginal cost (*Add the subsidy to amount already being given 30+20)
  • Payments by governments to farmers
  • Inefficient production
54
Q

What does a subsidy bring?

A

At the quantity produced:
 Marginal social benefit equals the market
price, which has fallen.
 Marginal social cost has risen.
 Marginal social cost exceeds marginal
social benefit. (*Shortage)

Econ 101: *My notes (3 decks)

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