Econ 101 Chapter 6

Question 1

Price ceiling or Price cap

Answer 1

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

Question 2

If the price ceiling is set above the equilibrium

Answer 2

• 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

Question 3

If the price ceiling is set below the equilibrium

Answer 3

• 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

Question 4

What’s rent ceiling

Answer 4

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

Question 5

What does a rent ceiling set below create?

Answer 5

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

Question 6

What’s a housing shortage?

Answer 6

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

Question 7

Whats search activity

Answer 7

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

Question 8

Increased Search activity

Answer 8

• 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

Question 9

A black market

Answer 9

• 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)

Question 10

Inefficiency of a rent ceiling

Answer 10

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

Question 11

What’s the full loss from a rent ceiling?

Answer 11

the sum of the deadweight loss + increased cost of search

(Look at graph in notebook) or Page 133

Question 12

Price floor

Answer 12

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

Question 13

Price floor set below equilibrium price

Answer 13

Has no effect / Does not constrain market forces

Question 14

Price floor set above equilibrium price

Answer 14

Prevent the price from regulating the quantities demanded and supplied

Question 15

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

Answer 15

• Minimum wage
• Minimum wage imposed at certain levels can create unemployment.

Question 16

If minimum wage is above Equilibrium rate what happens?

Answer 16

• 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.

Question 17

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

Answer 17

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

Question 18

Whats the OC of supplying labor

Answer 18

Leisure foregone

Question 19

Why is an unregulated labour market regarded as efficient?

Answer 19

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)

Question 20

what does minimum wage do the market?

Answer 20

1. Creates unemployment
2. Increased job search

Question 21

why is minimum wage inefficient

Answer 21

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

Question 22

What are the 2 prices when a transaction is taxed?

Answer 22

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

Question 23

Tax incidence?

Answer 23

Divison of the burden of tax between buyers & sellers.

Question 24

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)

Answer 24

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)

Question 25

Tax on sellers? What does this mean,

Answer 25

- Is like an increase in cost so it decreases supply

Question 26

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

Answer 26

- supply curve + Tax on sellers (Supply curve) - Demand curve- Tax on buyers (demand curve) *Go over with Tracy (SLIDESHOW)

Question 27

why are taxes inefficient?

Answer 27

leads to underproduction as MSB>MSC shrinks producer + consumer surplus + creates deadweight loss

Question 28

A tax as a wedge

Answer 28

- 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.

Question 29

why are taxes inefficient?

Answer 29

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

Question 30

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

Answer 30

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

Question 31

What is perfectly inelastic demand?

Answer 31

- The buyer pays the tax

Question 32

What about perfectly elstaic demand?

Answer 32

The seller pays the entire tax

Question 33

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

Answer 33

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

Question 34

Explain insulin as an example of perfectly inelastic demand

Answer 34

- Insulin's demand is consistent becasue it's a needed item for those who are diabetic. - If taxed the buyer would pay the burden.

Question 35

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

Answer 35

sellers pay for the tax equilibrium quantity decreases, there is underproduction + deadweight loss

Question 36

describe the relationship between deadweight loss + elasticity of demand

Answer 36

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

Question 37

Tax incidence of supply

Answer 37

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

Question 38

Perfectly inelastic supply

Answer 38

Sellers pay

Question 39

Perfectly elastic supply

Answer 39

Buyers pay

Question 40

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

Answer 40

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

Question 41

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

Answer 41

buyers pay the tax equilibrium quantity decreases, there’s underproduction + deadweight loss arises

Question 42

describe the relationship between deadweight loss + elasticity of supply

Answer 42

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

Question 43

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

Answer 43

- The benefits principle - The ability-to-pay principal

Question 44

What's the benefit principal

Answer 44

- The idea that people pay taxes equal to benefit receive from services provided from govy

Question 45

Why is principal benefits fair?

Answer 45

- The arrangement is fair because those that benefit must pay the most taxes.

Question 46

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

Answer 46

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

Question 47

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

Answer 47

A rich person can pay more because they can.

Question 48

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

Answer 48

- Production quotas - Subsidies

Question 49

What are production quotas?

Answer 49

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

Question 50

What's a subsidy/Equaation

Answer 50

- A payment to producer by a govy. - S-subsitdy payment

Question 51

What if production quotas is set above?

Answer 51

- Nothing would change

Question 52

What if production quotas is set below?

Answer 52

- 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)

Question 53

What are the effects of subsidy?

Answer 53

- 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

Question 54

What does a subsidy bring?

Answer 54

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)