Marketing interference Flashcards
What is the general definition of market interference?
Market interference is the movement away from what the free economy naturally does.
Who/What normally creates market interference?
The Government
What aspects are changed for market interference?
The price or quantity
What are the two price controls in market interference?
Price ceiling and price floor
What is a price ceiling?
A price ceiling is limit on the maximum price an item can be sold for
What is a price floor?
A price floor is a limit on the minimum price an item can be sold for
What terminology do we use to describe a price ceiling or floor
The ceiling/floor is either binding or unbinding
What is the difference between a binding ceiling/floor and an unbinding ceiling/floor?
An unbinding ceiling/floor is a price that falls above the equilibrium price (ceiling) or below the equilibrium price (floor), causing nothing to change in the market.
A binding ceiling/floor is a price that does the opposite of the unbinding ceiling/floor, creating a lot of inefficiency (especially involving surpluses and shortages)
With both the floor and ceiling, what is likely to happen to the number of consumers and producers?
The number of consumers and producers will end up dropping. The price will either be too high for consumers or there will be a shortage, causing a lack of benefit as a result of consumptions. The consumers will ultimately end up leaving, providing the producers no one to make transactions with and (possibly) experiencing a net loss.
What is the inequality representation of a binding price floor and ceiling?
A binding price floor = P^f>P*
A binding price ceiling = P^c<P*
What is Dead Weight Loss (DWL)?
Dead Weight Loss is the transactions that no longer occur because of an implemented ceiling or floor. This is typically caused by a lack of demand or supply create those transaction
What is a black market?
A black market is where consumers and producers find illegal ways around both price and quantity controls
Are the black markets useful?
To a certain extent, yes. Black markets help balance the economy and markets to bring it back to equilibrium. The side effect, however, is that anyone involved is turned into a criminal
What happens to the quality of a product in response to price floors and ceilings?
Price ceiling = the quality will be drastically worse because producers are not getting paid enough to create better quality and anyone will by it due to the shortage that is caused
Price floor = the quality will drastically improve to help motivate consumers to purchase the product at a higher price (consumers desire to get what they paid for)
In the case of shortages and surplus, which price control will cause which?
A price ceiling will cause a shortage due to a drastic increase in demand. A price floor will cause a surplus due to a drastic decrease in demand.
What state is the equilibrium left in after the implementation of a floor or ceiling?
After the implementation of a floor or ceiling, the equilibrium of the market is left in a constant state of disequilibrium until the controls are removed
In the case of a price floor, what happens to the surplus of items?
The surplus will either be taken by the government (usually when it is in poor quality) and is typically distributed to welfare and other government programs. Otherwise, the product is left to rot (physically and metaphorically))
How do people get around price ceilings (illegally)?
Performing a off-the-record, typically black-market style transaction
What is an example of people getting around price floors (illegally)?
The price floor is the minimum wage. To get around this, people will work off the books (typically as illegal immigrants) so the government doesn’t know they are working and what they are being paid.
Are binding price controls ever efficient?
No. In some fashion consumers and producers will be losing a lot of things they normally would have obtained in a normal free market
What are some of the most typical ways of setting a quantity control?
Requiring a license or permit and/or setting a quota
In the case of market interference, what is a quota?
A quota is the maximum quantity of an item a supplier is allowed to create and sell
What is the demand price?
The demand price is the price that will convince enough consumers to purchase the product but not enough to exceed the quota
What is the supply price?
The supply price is the minimum price needed to convince a producer to sell their product
How often do producers sell at the supply price?
Not very often. Their whole goal is to make as much money as possible so they will try to sell the item for as much as possible
What is a wedge?
A wedge is the difference between the supply price and the demand price
How do we know if there is going to be a wedge in the market?
We know there will be a wedge if the quota < p*
What is quota rent?
The quota rent is the official name for the wedge and it displays the profits a producer receives because they have a license/permit
Why would the government interfere and implement these controls if they aren’t efficient?
The government may implement controls due to equity concerns, the need/desire to redistribute welfare, and to receive more votes at an election
