Review 4 Price Controls Flashcards
Price controls
government-mandated process that are generally imposed in the form of maximum or minimum legal prices
Rent control
price ceiling intended to protect residents from high housing prices
Effect of an increase in demand on price and quantity
both increase
Price floor
a legally established minimum price buyers must pay for a good or resource.
Price ceiling
A legally established maximum price sellers can charge for a good or resource.
Effect of a price floor
surpluses
Shortages
A condition in which the amount of a good offered for sale by producers is less than the amount demanded by buyers at the existing price. An increase in price would eliminate the shortage.
Surplus
A condition in which the amount of a good offered for sale by producers is greater than the amount that buyers will purchase at the existing price. A decline in price would eliminate the surplus
Effects of rent control
- Shortages and black markets develop
- The future supply of rental housing will decline
- The quality of rental housing will deteriorate
- Non-price methods of rationing will become more important–discrimination
- Inefficient use of housing space–low turnover
Effect of minimum wage on unskilled labor market
- Discrimination
- High unemployment rates
- Higher prices for consumers
- Loss of non-wage benefits
- Black markets
What would happen if the equilibrium price is $8 and a price ceiling of $5 is imposed?
shortage
What would happen if the equilibrium price is $8 and a price floor of $5 is imposed?
no effect
What would happen if the equilibrium price is $8 and a price floor of $10 is imposed?
surplus
What would happen if the equilibrium price is $8 and a price ceiling of $10 is imposed?
no effect
At a price of $9 (price floor), 14 widgets are supplied and 11 widgets are demanded. How much would it cost the government to buy up the surplus caused by the price floor?
(14-11)9=$27
Assume that price controls create a surplus of widgets. Given this price control, how would an improvement in widget technology affect the production of widgets?
increase
Assume that price controls create a surplus of widgets. Given this price control, how would an improvement in widget technology affect the consumption of widgets?
no effect
Assume that price controls create a surplus of widgets. Given this price control, how would an improvement in widget technology affect the size of the surplus of widgets?
increase
Other than creating surpluses, what are effects of price ceilings?
- Discrimination
- Black markets
- Buyers wait-in-line
- Lower quality products
What type of price control tends to lead to sellers discriminating against buyers?
Price ceilings
What type of price control tends to lead to black markets?
Both
What type of price control tends to lead to lower quality products?
Price ceilings
What type of price control tends to lead to consumers waiting in line to buy a produce?
Price ceilings
What type of price control tends to lead to buyers discriminating against sellers?
Price floors
Is the surplus caused by government price controls larger if demand in the market is elastic or inelastic?
elastic
Is the shortage caused by government price controls larger if demand in the market is elastic or inelastic?
elastic
Is the surplus caused by government price controls larger if supply in the market is elastic or inelastic?
elastic
Is the shortage caused by government price controls larger if supply in the market is elastic or inelastic?
elastic
How does a price ceiling affect the amount of producer surplus in a market?
decreases it
How does a price floor affect the amount of consumer surplus in a market?
decreases it
Predatory pricing
the pricing of goods or services at such a low level that other suppliers cannot compete and are forced to leave the market
Price collusion (price fixing)
An agreement among competitors to raise, lower, maintain, or stabilize prices or price levels
Price gouging
The practice of increasing the prices of goods, services, or commodities to a level much higher than is considered reasonable or fair.
