Lecture 10 Flashcards
Define a price ceiling
A price ceiling or price cap is a regulation that makes it illegal to charge a price higher than a specified level.
When a price ceiling is applied to a housing market, it is called a…
rent ceiling
What is the effect if the rent ceiling is set above the equilibrium rent
It has no effect, the market works as if there were no ceiling.
What is the effect of a rent ceiling set below the equilibrium rent?
-housing shortage
-increased search activity
-a black market
define search activity
The time looking for someone to do business with is called search activity.
when a price is regulated and there is a shortage, search activity…
Increases. Search activity is costly and competitive (housing)
define black market
A black market is an illegal market that operates alongside a legal market in which a price ceiling or other restriction has been imposed.
what creates a black market in housing?
shortage of housing
Inefficiency of a rent ceiling- rent ceiling set below equilibrium price.
-A rent ceiling set below the equilibrium rent leads to an inefficient underproduction of housing services
- The marginal social benefit from housing services exceeds its marginal social cost and a deadweight loss arises
What is a price floor?
A price floor is a regulation that makes it illegal to trade at a price lower than a specified level
When a price floor is applied to labor markets, it is called a…
minimum wage
If a minimum wage is set below the equilibrium, what happens?
it has no effect, the market works as if there were no minimum wage.
if the minimum wage is set above the equilibrium rate, what happens?
-minimum wage brings unemployment (high minimum wage forces businesses to cut back on employees)
-the quantity of labor supplied by workers exceeds the quantity demanded by employers
- there is a surplus of labor
