Lesson 7 Economics Welfare/Govt intervention

Question 1

Price Ceiling

Answer 1

Legislated maximum price

Question 2

Price floor

Answer 2

legislated minimum price

Question 3

Binding vs non-binding price ceiling

Answer 3

1) Non-binding = if price ceiling is above equilibrium price –> no effect on markets
2) Binding = if price ceiling is below equilibrium price –> markets cannot reach equilibrium –> will be a shortage –> creates a rationing system that is inefficient (people may wait in lines or people who friends with business get it)

Question 4

Binding price floor

Answer 4

1) Creates a surplus since forces equilibrium price to be pushed up
2) problem = sellers may appeal to buyers’ personal biases to get them to buy stuff (before the price was the sole discriminating factor)

Question 5

Problem with minimum wage

Answer 5

1) often encourages teens to drop out of high school
2) many minimum wage workers r just teens trynna earn extra money
3) makes organizations pay less money to other relatively unskilled workers
4) increases supply of labor BUT organizations want to hire less –> more unemployment

Question 6

earned income tax credit

Answer 6

1) government program that supplements incomes of low wage workers –> raises living standards of poor without discouraging firms from hiring

Question 7

Welfare economics

Answer 7

Study of how allocation of resource affects economic well being

Question 8

Willingness to pay

Answer 8

1) buyer’s maximum price –> how much they value the good

Question 9

Consumer surplus

Answer 9

1) amount buyer willing to pay for good minus amount actually pay for it
2) Area below demand curve + above price –> consumer surplus in market (forms a triangle like shape)

Question 10

Shift in price –> effect on consumer surplus

Answer 10

Creates a trapezoid, where the rectangle part is additional consumer surplus for existing consumers + triangle on right is consumer surplus for new consumers

Question 11

Why might consumer surplus be ignored

Answer 11

1) biases –> measures how much buyers perceive value in what they buy
2) policymakers make disregard it if they do not respect preferences driving buyer behavior
Generally consumer surplus – reflects economic well being

Question 12

What is a producer’s cost

Answer 12

1) opportunity cost = includes out of pocket expenses + value that he places on his time
2) reflects willingness to sell his services

Question 13

Producer surplus

Answer 13

1) amount seller is paid - cost of production
2) area below price + above producer surplus (above line)

Question 14

Price given on supply/demand curve shows

Answer 14

1) MARGINAL BUYER/SELLER
2) in an economy with many buyers/sellers –> do not see the individual “bumps” because they all mesh together –> flattens out

Question 15

Total surplus

Answer 15

1) sum of consumer surplus + producer surplus
TOTAL SURPLUS = VALUE TO BUYERS - COST TO SELLERS

Question 16

What is efficiency

Answer 16

1) When allocation of resources maximizes total surplus
2) Examples of inefficiency –> if good is being produced by sellers with lowest costs

Question 17

What is equality

Answer 17

1) whether various buyers + sellers in market have similar levels of economic well being

Question 18

2 insights about market outcomes

Answer 18

1) allocate supply of goods to buyers who value them most
2) allocate demand for goods to sellers who can produce them at lowest cost
3) produce quantity of goods that maximizes sum of consumer/producer surplus

Question 19

Laissez Faire

Answer 19

1) leaving well enough alone

Question 20

When a market is in equilibrium, the buyers are those with the _______ willingness to pay, and the sellers are those with the ______ costs.

Answer 20

1) highest
2) lowest

Question 21

Market Power

Answer 21

1) ability to influence prices
2) perfectly competitive market –> nobody has market power