Econ 101 Chapter 6 Flashcards
Price ceiling or Price cap
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
If the price ceiling is set above the equilibrium
- 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
If the price ceiling is set below the equilibrium
- 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
What’s rent ceiling
- When a price ceiling is applied to the housing market
- Rent ceiling only focuses on the rent portion of housing.
What does a rent ceiling set below create?
- A housing shortage
- Increased search activity
- A black market
What’s a housing shortage?
- When quantity demanded exceeds what’s supplied.
- Creates an allocation problem to frustrated demanders creating “Increased search activity”.
Whats search activity
- Time spent looking to do business with someone
- Spend time looking at alternatives before making a choice
Increased Search activity
- 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
A black market
- 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)
Inefficiency of a rent ceiling
- Inefficient underproduction of housing
- Marginal social benefit of housing exceeds marginal social cost and a deadweight loss shrinks the producer surplus and consumer surplus
What’s the full loss from a rent ceiling?
the sum of the deadweight loss + increased cost of search
(Look at graph in notebook) or Page 133
Price floor
- A government regulation that makes it illegal to charge a price lower than a specified level
Price floor set below equilibrium price
Has no effect / Does not constrain market forces
Price floor set above equilibrium price
Prevent the price from regulating the quantities demanded and supplied
What is it called when a price floor is applied to labour market
- Minimum wage
- Minimum wage imposed at certain levels can create unemployment.
If minimum wage is above Equilibrium rate what happens?
- 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.
What’s the labour market’s QD/QS represent?
- The supply curve is the supply a worker is supplying his/hers labor
- The demand measures the demand/need of the labor itself
Whats the OC of supplying labor
Leisure foregone
Why is an unregulated labour market regarded as efficient?
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)
what does minimum wage do the market?
- Creates unemployment
- Increased job search
why is minimum wage inefficient
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
What are the 2 prices when a transaction is taxed?
- price that includes tax - buyers respond
- price that exclude tax - sellers respond
Tax incidence?
Divison of the burden of tax between buyers & sellers.
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)
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)
Tax on sellers? What does this mean,
- Is like an increase in cost so it decreases supply
How to find supply/demand curves (with taxes position)?
- supply curve + Tax on sellers (Supply curve)
- Demand curve- Tax on buyers (demand curve)
*Go over with Tracy (SLIDESHOW)
why are taxes inefficient?
leads to underproduction as MSB>MSC
shrinks producer + consumer surplus + creates deadweight loss
A tax as a wedge
- 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.
why are taxes inefficient?
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
What is the idea behind the Tax incidence of elasticity of Demand?
The division between buyers and sellers depend on eslaticity of supply/demand
What is perfectly inelastic demand?
- The buyer pays the tax
What about perfectly elstaic demand?
The seller pays the entire tax
describe what happens when there is perfectly inelastic demand + tax incidence?
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
Explain insulin as an example of perfectly inelastic demand
- Insulin’s demand is consistent becasue it’s a needed item for those who are diabetic.
- If taxed the buyer would pay the burden.
What happens there’s perfectly elastic demand + tax incidence?
sellers pay for the tax
equilibrium quantity decreases, there is underproduction + deadweight loss
describe the relationship between deadweight loss + elasticity of demand
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
Tax incidence of supply
Shows the elasticity of supply and the division between buyers and sellers.
Perfectly inelastic supply
Sellers pay
Perfectly elastic supply
Buyers pay
what happens when there’s perfectly inelastic supply + tax incidence?
sellers pay the tax
equilibrium quantity stays constant, there’s no underproduction + no deadweight loss arising from tax
what happens when there is perfectly elastic supply + tax incidence?
buyers pay the tax
equilibrium quantity decreases, there’s underproduction + deadweight loss arises
describe the relationship between deadweight loss + elasticity of supply
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
What two systems to economists propose to apply fairness to a tax system?
- The benefits principle
- The ability-to-pay principal
What’s the benefit principal
- The idea that people pay taxes equal to benefit receive from services provided from govy
Why is principal benefits fair?
- The arrangement is fair because those that benefit must pay the most taxes.
what’s the The ability-to-pay principal?
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
How is the - The ability-to-pay principal fair?
A rich person can pay more because they can.
What two methods do a government use to intervene in markets for farm products?
- Production quotas
- Subsidies
What are production quotas?
The upper limit to the quantity of a good that may be produced during a specific period.
What’s a subsidy/Equaation
- A payment to producer by a govy.
- S-subsitdy payment
What if production quotas is set above?
- Nothing would change
What if production quotas is set below?
- 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)
What are the effects of subsidy?
- 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
What does a subsidy bring?
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)
