question
price control
answer
-a law that regulates the price of a good or service
-distort price signals, do not change the value of what is being controlled
-distort price signals, do not change the value of what is being controlled
question
price floor
answer
-establishes a MINIMUM legal price; ABOVE the equilibrium, prevents price from falling
-example: minimum wage, will lead to a labor surplus (unemployment)
-example: minimum wage, will lead to a labor surplus (unemployment)
question
direct effect of price floor
answer
-a surplus, sellers want to supply more QTY than buyers are willing to buy
question
indirect effect of price floor
answer
-QTY exchanged will fall
-gains of trade will fall
-gains of trade will fall
question
price floor affects
answer
-market forces try to push price down
-producers bid price down
-keeps above equilibrium
-producers bid price down
-keeps above equilibrium
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minimum wage effects
answer
-as min wage increases; job training, working conditions and employment will decline
-benefits; higher skill workers employed at expense of lower skilled workers
-benefits; higher skill workers employed at expense of lower skilled workers
question
---price ceiling
answer
-establishes a MAXIMUM legal price BELOW the equilibrium
-example: rent control
-example: rent control
question
price ceiling effects
answer
-demand exceeds supply; creates a shortage
-consumers bid consumers; drives price up
-purpose is to provide lower rent to lower income people
-consumers bid consumers; drives price up
-purpose is to provide lower rent to lower income people
question
rent control effects
answer
-shortages and black markets
-future supply of houses will decline
-quality of houses decrease
-long term renters benefit
-rationing: "must buy furniture", under the table payments
-future supply of houses will decline
-quality of houses decrease
-long term renters benefit
-rationing: "must buy furniture", under the table payments
question
transfers
answer
-surplus of goods that moves consumers to producers or vice versa, due to price regulations!
-consumer surplus to producer surplus = drop in surplus
-consumer surplus to producer surplus = drop in surplus
question
deadweight loss
answer
The fall in total surplus that results from a market distortion, such as a tax.
a loss of total surplus that occurs because the quantity of a good that is bought and sold is below the market equilibrium quantity
a loss of total surplus that occurs because the quantity of a good that is bought and sold is below the market equilibrium quantity
question
prices
answer
-reflect value and serve as signals
question
Davis bacon act
answer
-mandates all federal financed or assisted construction worker; super min. wage
question
black market
answer
-market that operates outside of the legal system
-evasion of price control and tax (cigs)
-illegal sales (drugs)
-leads to higher prices on market
-evasion of price control and tax (cigs)
-illegal sales (drugs)
-leads to higher prices on market
question
---war on drugs
answer
-is an example of price control
-prohibition sets a price ceiling of zero
-BENEFITS: governments funds from assets, maintains bureaus, private prisons
-prohibition sets a price ceiling of zero
-BENEFITS: governments funds from assets, maintains bureaus, private prisons
question
why is prohibition used
answer
-curtail drug use
-reduce crime
-prevent drug related illness
-idea; by setting the price the price to zero, the market for drugs will be eliminated, targets both the supply and the demand
-reduce crime
-prevent drug related illness
-idea; by setting the price the price to zero, the market for drugs will be eliminated, targets both the supply and the demand
question
unintended consequences of prohibition
answer
1) markets are pushed underground
2) violence;
3) cartelization; prohibition looks to disrupt the supply side
4) corruption
5) criminalization
2) violence;
3) cartelization; prohibition looks to disrupt the supply side
4) corruption
5) criminalization
question
prohibition as a tax
answer
-acts like a tax on sellers
-must incorporate fines, prison time, evasion cost= fewer sellers
-results in increase of prices to drive sellers out of the market
-must incorporate fines, prison time, evasion cost= fewer sellers
-results in increase of prices to drive sellers out of the market
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