Ch. 5, The Market Strikes Back (Price and Quantity Controls)

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20 terms · Part 2: Supply and Demand UIC ECON 120: Principles of Microeconomics Summer Session 2012

Price controls

Lega restrictions on how high or low market price may go

Price ceiling

Upper limit on price

Price floor

Lower limit on price

Deadweight loss

Loss in total surplus that occurs whenever action or policy reduces quantity transacted below equilibrium quantity

Transfer of surplus

Loss in surplus to one person that is then moved into someone else's gain

Inefficient allocation to consumers

Consequence of price ceilings; people who want good badly and are willing to pay high price don't get it, and those who care relatively little about good and are only willing to pay low price do get it

Wasted resources

Buyers and sellers expend resources to cope with shortages and surpluses

Inefficiently low quality

Consequence of price ceilings; sellers offer low-quality goods at low price even though buyers would prefer higher quality at higher price

Black markets

Market in which goods are bought and sold illegally either because it is illegal to sell them or because prices charged are legally prohibited

Minimum wage

Legal floor on wage rate, the market price of labor

Inefficient allocation of sales among sellers

Caused by price floors; those who would be willing to sell the good at lowest price are not always those who actually manage to sell it

Inefficiently high quality

Consequence of price floors; sellers offer high quality goods at high price, even though buyers would prefer lower quality at lower price

Quantity control

Upper limit on quantity of some good that can be ttransacted

Quota

Quantity control

Quota limit

Total amount of good that can be legally transacted

License

Gives its owner right to supply good

Demand price

Price at which consumers will demand given quantity

Supply price

Price at which suppliers will supply a given quantity

Wedge

Consequence of quantity control; difference between demand price and supply price at a given quantity; price paid by buyer is higher than price received by seller

Quota rent

Wedge; earnings that accrue to license-holder from ownership of right to sell good; equal to market price of license when licenses are traded

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