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Karteikarten von Jasmine Wells, aktualisiert more than 1 year ago
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| Frage | Antworten |
| What are price controls? | They refer to setting of minimum or max price by the government, so that prices are unable to adjust to their equilibrium level determined by forces of demand and supply. |
| What do price controls result in? | Market disequilibrium and therefore shortages (excess demand) or surplus (excess supply) |
| What is a price ceiling? | A set legal maximum price for a particular good. |
| What is the impact of a price ceiling? | Price ceiling results in lower quantity supplied than at equilibrium price - Price ceiling gives rise to a larger quantity demanded than at equilibrium price - As a result, creates price disequilibrium (shortage) |
| What is price rationing? | Occurs in the free market where a good is sold is divided up amongst possible buyers according to price system and who buys it. |
| What is non-price rationing? | A system of distribution of goods where once a shortage arises, is achieved by: - First come first serve - Distribution of coupons to all interested buyers (so that they can only purchase a fixed amount in a given time) - Favouritism by sellers |
| What are underground/parallel markets? | Involve buying/selling transactions that are unrecorded and are usually illegal. |
| Give an example of parallel markets occuring when price ceiling exists. | When a price ceiling occurs, people involved in parallel markets buy the good at the maximum legal price and illegally sell it at price above maximum. This may occur when the shortage resulted in dissatisfied people who have not succeeded purchasing the good due to the shortage and are willing and able to purchase good at a higher price. |
| Describe the allocation of resources to the good in relation to price ceilings. | Price ceilings caused a lower equilibrium price resulting in a lower quantity supplied and a greater quantity demanded. There are too few resources allocated to the production of good, relative to social optimum.(resulting in welfare loss) |
| How do price ceilings affect consumers? | - Consumers partly gain surplus and partly lose surplus (to welfare loss) due to the price ceiling. |
| How do price ceilings affect producers? | They are worse off as: -They sell smaller quantity of good at a smaller price - Also lose producer surplus to consumers and welfare loss |
| How do price ceilings affect workers? | Less output is produced therefore less workers are needed - resulting in unemployment. |
| How do price ceilings affect the government? | No gains, but may gain in political popularity. - May lose due to compensation needed to pay out for unemployment. |
| What is a rent control? | Consists of max legal rent on housing. (Below market determined price) This is done to make housing more affordable for low income earners. |
| What are the consequences of rent control? | - Shortage of houses (ie. demand is greater than supply) - Long waiting list of interested tenants - underground /parallel markets arise where rent is above max legal price - Houses are not maintained properly due to unaffordability. |
| What are food price controls? | Method to make food more affordable for low income earners. |
| What is a price floor? | A legal set minimum price |
| Why do governments impose price floors? | a) To provide income support for famers by offering them prices above market determined prices. b) to protect low skilled low waged workers by offering them minimum wages. |
| Describe price floors and agricultural firms. | Farmers incomes in many countries are often unstable/too low due to sale of their product in the market (low price elasticity of demand and supply) - Price floors are set by gov so that they are able to be supported - This increases in the farmer's quantity supplied but there is a less of a demand. - This unbalance leads to a surplus. - Government usually buys off surplus (excess supply) which causes righward shift of demand curve. |
| What are 2 ways governments can make use of the purchased surplus? | - Export surplus, however it involves subsidising good to lower high costs to make price competitive,this means additional cost to government - Use it to send aid to developing countries |
| How can price floors lead to firm inefficiency? | Products with prices that are higher than equilibrium can lead to inefficient production: they do not face incentives to cut costs by using efficient production methods because high price offers protection from lower cost competitiors. |
| What are the effect of price floor on consumers? | - They are worse off: they must pay higher prices for good while receiving smaller quantites. - loss of consumer surplus to producers |
| What effect do price floors have on producers? | - They are better off: they receive higher prices and produce higher quantities - Increase revenues as government purchases surplus - Protected against low cost competition also do not face strong incentives to become efficient |
| What effect do price floors have on workers? | - Likely to gain employment as there is greater production of the good. |
| What effect do price floors have on the government? | - Burden on budget when buying excess supply. Results in less government funds elsewhere in the economy. - Costs are paid by tax payers!! |
| What effect do price floors have on stakeholders in other countries? | Exports can muddle local prices, forced to sell their products at low prices to compete. Some may go out of business. |
| What is a minimum wage? | Laws that determine minimum price of labour that an employer must pay. |
| What are the 4 consequences of minimum wage for an economy? | 1) Causes labour surplus as higher wage makes work more attractive and there is a decrease in demand of labour by firms 2) Creates opportunities for illegal workers to work below minimum wage. e.g. immigrants willing to be paid less than minimum wage 3) Missalocation of labour resources- prevents markets from establishing clearing price of labor. 4) Missalocation of product market - firms relying heavily on unskilled workers may experience an increase in cost of production |
| What effects do minimum wages have on firms? | They are worse off as they face higher costs of production. Loss of employer surplus |
| What are the effects of minimum wage on workers? | Some gain due to higher wages some lose due to loss of job. |
| What are the effects of price floors on consumers? | They are negatively affected, higher labour costs= decrease in supply = higher product prices. |
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