Price Control Key Terms
Key Terms
Black Market: a market in which goods and services are bought and sold illegally – either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price ceiling.
Deadweight Loss: the lost surplus associated with the transactions that no longer occur due to market interaction; due to low quantity stemming from government.
Demand Price: the price of a given quantity at which consumers will demand that amount/quantity.
License: a thing which gives its owner the right to supply a good.
Minimum Wage: a legal floor on the wage rate, which is the market price of labor.
Price Control: when a government intervenes to regulate prices.
Price Floor: minimum prices set by the government for certain commodities and services that it believes are being sold in an unfair market with too low of a price and thus their producers deserve some assistance; this is set above the equilibrium price.
Price Ceiling: maximum prices set by the government for particular goods and services that they believe are being sold at too high of a price and thus consumers need some help purchasing them; this is set below the market equilibrium.
Quantity Control (Quota): an upper limit on the quantity of some good that can be bought or sold.
Quota Limit: the total amount of the good that can be legally transacted.
Quota Rent: the difference between the demand and supply price at the quota limit is the quota rent; or in other words, the earnings that accrue to the license holder from owner ship of the right to sell the good. It is equal to the market price of the license when the licenses are traded.
Supply Price: the price of a given quantity at which producers will supply that quantity.
Wedge: caused by a quantity control (quota), which creates a gap between the demand price and the supply price of a good; that is the price paid by buyers ends up being higher than that received by sellers.
Black Market: a market in which goods and services are bought and sold illegally – either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price ceiling.
Deadweight Loss: the lost surplus associated with the transactions that no longer occur due to market interaction; due to low quantity stemming from government.
Demand Price: the price of a given quantity at which consumers will demand that amount/quantity.
License: a thing which gives its owner the right to supply a good.
Minimum Wage: a legal floor on the wage rate, which is the market price of labor.
Price Control: when a government intervenes to regulate prices.
Price Floor: minimum prices set by the government for certain commodities and services that it believes are being sold in an unfair market with too low of a price and thus their producers deserve some assistance; this is set above the equilibrium price.
Price Ceiling: maximum prices set by the government for particular goods and services that they believe are being sold at too high of a price and thus consumers need some help purchasing them; this is set below the market equilibrium.
Quantity Control (Quota): an upper limit on the quantity of some good that can be bought or sold.
Quota Limit: the total amount of the good that can be legally transacted.
Quota Rent: the difference between the demand and supply price at the quota limit is the quota rent; or in other words, the earnings that accrue to the license holder from owner ship of the right to sell the good. It is equal to the market price of the license when the licenses are traded.
Supply Price: the price of a given quantity at which producers will supply that quantity.
Wedge: caused by a quantity control (quota), which creates a gap between the demand price and the supply price of a good; that is the price paid by buyers ends up being higher than that received by sellers.
Price ceiling is a maximum price sellers are allowed to charge for a good or service. Using rent control as an example as shown above. The orange horizontal line represents the price ceiling on rents of $400 per month. This price ceiling reduces the quantity of apartments supplied to Qs, Point A, and increases the quantity demanded to Qd, Point B. This creates a shortage between Qd and Qs.
Price floor is a minimum price buyers are required to pay for goods or services. Using rent control as an example as shown above. The orange horizontal line represents the price floor on rents of $800 per month. This price floor reduces the quantity demanded to Qd, Point A, and increases the quantity supplied to Qs. Point B. This creates a surplus between Point A and Point B.
Inefficiency caused by Price Ceilings
Price ceilings often lead to inefficiency in the form of inefficient allocation to consumers. This means people want the goods badly and are willing to pay a high price don't get it, and those who care relatively little about the good and are willing to pay a relatively low price do get it. Another inefficiency caused by price ceilings is that it leads to wasted resources. Wasted resources are happen when people expend money, effort and time to cope with the shortages caused by a price ceiling.
Inefficiency caused by Price Floors
Price floors lead to inefficient allocation of sales among sellers. This means those who would be willing to sell the good at the lowest price are not always those who manage to sell it. Price floors also lead to inefficiency in that goods of inefficiency high quality are offered. This is when sellers offer high-quality goods at a high price, even though buyers would prefer a lower quality at a lower price.
Price ceilings often lead to inefficiency in the form of inefficient allocation to consumers. This means people want the goods badly and are willing to pay a high price don't get it, and those who care relatively little about the good and are willing to pay a relatively low price do get it. Another inefficiency caused by price ceilings is that it leads to wasted resources. Wasted resources are happen when people expend money, effort and time to cope with the shortages caused by a price ceiling.
Inefficiency caused by Price Floors
Price floors lead to inefficient allocation of sales among sellers. This means those who would be willing to sell the good at the lowest price are not always those who manage to sell it. Price floors also lead to inefficiency in that goods of inefficiency high quality are offered. This is when sellers offer high-quality goods at a high price, even though buyers would prefer a lower quality at a lower price.
This video explains price floors and price ceilings.
Price Ceilings and Price Floors. (n.d.). Retrieved June 10, 2015, from https://www.youtube.com/watch?v=vxD3K2ikXNc
When you have read through the Key Terms, reviewed the graphs and watched the video we have attached two quizzes for you to compete. One is multiple choice and the other has matching as well as true or false.
check-ins.docx | |
File Size: | 18 kb |
File Type: | docx |
self-quiz.docx | |
File Size: | 20 kb |
File Type: | docx |
References
Microeconomics ch.5: Price controls. (n.d.). Retrieved June 10, 2015, from https://quizlet.com/38269384/microeconomics-ch5-price-controls-flash-cards/
Ray, M. (2015). Krugman's economics for ap - high school. Place of publication not identified: Worth Pub.