Marketing interference

Question 1

What is the general definition of market interference?

Answer 1

Market interference is the movement away from what the free economy naturally does.

Question 2

Who/What normally creates market interference?

Answer 2

The Government

Question 3

What aspects are changed for market interference?

Answer 3

The price or quantity

Question 4

What are the two price controls in market interference?

Answer 4

Price ceiling and price floor

Question 5

What is a price ceiling?

Answer 5

A price ceiling is limit on the maximum price an item can be sold for

Question 6

What is a price floor?

Answer 6

A price floor is a limit on the minimum price an item can be sold for

Question 7

What terminology do we use to describe a price ceiling or floor

Answer 7

The ceiling/floor is either binding or unbinding

Question 8

What is the difference between a binding ceiling/floor and an unbinding ceiling/floor?

Answer 8

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)

Question 9

With both the floor and ceiling, what is likely to happen to the number of consumers and producers?

Answer 9

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.

Question 10

What is the inequality representation of a binding price floor and ceiling?

Answer 10

A binding price floor = P^f>P*
A binding price ceiling = P^c<P*

Question 11

What is Dead Weight Loss (DWL)?

Answer 11

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

Question 12

What is a black market?

Answer 12

A black market is where consumers and producers find illegal ways around both price and quantity controls

Question 13

Are the black markets useful?

Answer 13

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

Question 14

What happens to the quality of a product in response to price floors and ceilings?

Answer 14

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)

Question 15

In the case of shortages and surplus, which price control will cause which?

Answer 15

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.

Question 16

What state is the equilibrium left in after the implementation of a floor or ceiling?

Answer 16

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

Question 17

In the case of a price floor, what happens to the surplus of items?

Answer 17

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))

Question 18

How do people get around price ceilings (illegally)?

Answer 18

Performing a off-the-record, typically black-market style transaction

Question 19

What is an example of people getting around price floors (illegally)?

Answer 19

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.

Question 20

Are binding price controls ever efficient?

Answer 20

No. In some fashion consumers and producers will be losing a lot of things they normally would have obtained in a normal free market

Question 21

What are some of the most typical ways of setting a quantity control?

Answer 21

Requiring a license or permit and/or setting a quota

Question 22

In the case of market interference, what is a quota?

Answer 22

A quota is the maximum quantity of an item a supplier is allowed to create and sell

Question 23

What is the demand price?

Answer 23

The demand price is the price that will convince enough consumers to purchase the product but not enough to exceed the quota

Question 24

What is the supply price?

Answer 24

The supply price is the minimum price needed to convince a producer to sell their product

Question 25

How often do producers sell at the supply price?

Answer 25

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

Question 26

What is a wedge?

Answer 26

A wedge is the difference between the supply price and the demand price

Question 27

How do we know if there is going to be a wedge in the market?

Answer 27

We know there will be a wedge if the quota < p*

Question 28

What is quota rent?

Answer 28

The quota rent is the official name for the wedge and it displays the profits a producer receives because they have a license/permit

Question 29

Why would the government interfere and implement these controls if they aren’t efficient?

Answer 29

The government may implement controls due to equity concerns, the need/desire to redistribute welfare, and to receive more votes at an election