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Microeconomics Chapter 4

Terms in this set (84)

The forces of _____________ deserve some credit. They cause the market price to adjust until something remarkable happens: The quantity that sellers want to sell is also the quantity that buyers want to buy.
Supply and demand
What are two examples of the government fighting the market-- that is, preventing the price from reaching its equilibrium value.
Price ceilings and price floors
What is a price ceiling?
A government imposed maximum price in the market.
See Price ceiling graph
On page 90
If the ceiling is enforced then producers will no longer be able to charge $3 for maple syrup but will have to content themselves with $2 instead.
Ordinarily, the excess demand would force the price back up to $3, but now the price ceiling prevents this from occurring.
When quantity supplied and quantity demanded differ-- the _____________,whichever of the two quantities is smaller- will prevail.
short side of the market
Since we cannot force sellers to sell any more than they want to the result is a ________.
Shortage
What is a shortage?
An excess demand not eliminated by a rise in price, so that quantity demanded continues to exceed quantity supplied.
What is the short side of the market?
The smaller quantity supplied and quantity demanded at a particular price.
A __________ creates a shortage and increases the time and trouble required to buy the good. While the price decreases, the opportunity cost may rise.
Price ceiling
What is the black market?
A market in which goods are sold illegally at a price above the price ceiling.
The unintended consequences of __________ -- long lines, black markets, and often, higher prices-- explain why they are generally a poor way to bring down prices.
Price ceilings
Price ceilings are exceedingly rare. But there is one type of market in which several cities have imposed long lasting ceilings: ______________.
The market for apartment rentals
What is an example of a price ceiling?
Rent Control
What are rent controls?
Government imposed maximum rents on apartments and homes. Designed to keep housing affordable.
What is the problem with rent control?
It is supposed to target those with low income, but rather, it is used by anyone who was lucky enough to be living in one of the affected units when rent control was first imposed getst to pay less than the market rent, as long as he or she continues to hold the lease on the unit.
What the problem with rent control?
It creates persistent excess demand for rental units, so renters must spend more time and trouble finding an apartment. Typically, something akin to the black market develops: Real estate brokers quickly snap up the rent-controlled apartments.
Another problem with rent control?
They cause a decrease in the quantity of apartments supplied because lower rents reduce the incentives for owners to maintain existing apartments in rentable condition and also reduce incentives to build new ones.
What is a price floor?
A government-imposed minimum price in the market.
Price floors for agricultural goods are commonly called ____________.
Price support programs
What government agency often put price floors on agricultural products?
The USDA
The excess supply would ordinarily push the market price down to its equilibrium value. But note the price floor prevents this from happening. The result is ________-- continuing extra production of nonfat dry milk that no one wants to buy at the going price.
A Surplus
What is a surplus?
An excess supplly not eliminated by a fall in price, so that quantity supplied continues to exceed quantity demanded.
If the government merely declared a price floor, many sellers who are unable to sell all of their product would be tempe to sell some illegally at a price below the floor. This would take sales away from other farmers trying to sell at the higher price, so they, too, would feel pressure to violate the floor. Soon, the price floor would collapse.
To prevent this, governments around the world have developed a variety of policies designed to prevent surplus goods from forcing down the price. One method, is for the government to promise to buy any unsold product at a guaranteed price. With this policy, the sellers would not sell below the price because they could always sell to the government.
A price floor creates a ________ of goods. In order to maintain the price floor, the government must prevent the surplus from driving down the market price. In practice, the government often accomplishes this goal by _________________.
surplus, purchasing the surplus itself.
In order for the government to save money in regards to buying surpluses, give examples of some of the governments precautions.
In the dairy market for example, the government has developed a complicated management system to control the production and sale of milk to manygactureers and processors. In other markets the government has ordered or paid farmers not to grow crops on portions of their land and has imposed strict limits on imports of food from abroad.
Many farmers who benefit from price floors are wealth individuals or large, powerful corporations that do not need the assistance. True or False?
TRUEEEE
With price loots and price ceilings, the government tries to ______ the market from reaching its equilibrium value.
Prevent
If the government wants to intervene in a different way from price floors and ceilings that prevent the market from reaching its equilibrium value, what does it do?
Using taxes or subsidies that stand in the way and let the market help to achieve the desired outcome.
Why are taxes utilized besides the obvious reasons of providing public goods and services?
To change the price or quantity in the market
What is an excise tax?
A tax on a specific good or service
A tax collected from sellers shifts the supply curve _______ by the amount of the tax.
upward
What is a tax incidence?
The division of a tax payment between buyers and sellers, determined by comparing the new (after tax) and old (pretax) market equilibriums.
The incidence of a tax that is collected from sellers generally falls on both sides of the market. Buyers pay more, and sellers receive less, for each unit sold.
YEPP.
A tax collected from buyer shifts the demand curve _______ by the amount of the tax.
downward
The incidence of a tax that is collected from buyers generally falls on both sides of the market. Buyers pay more, and sellers receive less, for each unit sold.
yerp.
The ____________ -- the distribution of the burden between buyers and sellers) is the same whether the tax is collected from buyers or sellers. Why?
Incidence tax, Because the two methods of collecting taxes are not really different in any important economic sense.
What is a subsidy?
A government payment to buyers or sellers on each unit purchased or sold. It lowers prices to buyers and encourages people to buy it.
Which way does a subsidy shift the demand curve?
Upward by the amount of the subsidy
A subsidy paid to buyers benefits both sides of the market. Buyers pay _____ and sellers receive _____ for each unit sold.
Less, more
the distribution of benefits tom a subsidy is the same, regardless of whether the subsidy is paid to buyers or sellers.
Insightful, wow.
Taxes and subsidies change the market ______ and they affect ______ (through their impact on the government budget).
quantity, taxpayers
A _____ variable measures the quantity at a moment in time. A _______ variable measures the process that takes place over a period of time.
Stock variable, flow variable
What variable approach is used in Chapter 4 in regards to the housing market?
Stock Approach
Look at the stock graph in the book
Page 102
What is a vertical line showing the total number of homes in a market that are available for ownership?
Supply curve for housing
Why is the supply curve for housing a vertical line?
Because, no matter what the price, the housing stock at any point in time is fixed, determined by the number of homes that were built in the past and still suitable for ownership.
When the price of homes changes, we move __________ the vertical supply curve for housing.
along (up or down)
Over time, the housing stock can change, causing the supply curve to _________.
Shift
Could the supply curve ever shift leftward?
Yes, if the housing stock decreased. This would occur if an earthquake or another natural disaster destroyed existing homes.
What is a curve showing, at each price, the total number of homes that everyone in the market would like to own, given the constraints that they face?
Demand curve for housing
The demand curve slopes __________: As the average price of a home in this city falls, more people want to own them.
Downward
The greater price of the home, __________________________.
the more the buyer will have to pay, and the more interest the buyer will forgo each year.
A loan given to a home-buyer for part of the purchase price of the home.
Mortgage
Most people do not pay the entire purchase price of the house themselves, instead they pay fora small part of the purchase with their own funds called ____________--and borrow the rest, getting a housing loach called a __________.
Down Payment, mortgage
For most of that time, the monthly payment will consist largely of ____________.
Interest charges
Any change in the home's price,-- even after it was purchased-- will change the owner's costs. Continued ownership, therefore, means ________________.
continued forgotten interest
The higher the price at which a house could be sold, the more _________ the owner sacrifices in not selling.
Interest
Both current and prospective homeowners face an interest cost of ownership. This cost rises when current home prices rise, and falls when current home prices fall.
True.
Anything that might affect the number of homes demanded other than the current price of a home. If any of these other factors change, the demand curve will __________.
Shift
What happens when there is an excess demand for homes?
People who want homes, but don't yet have them, will try to buy them from the current owners, bidding up prices. The rise in price will not change the quantity of homes available. But it will move us along the demand curve (upward and leftward from point C. THe price will continue rising until the number of people who want to own a home is equal to the number of homes that can be owned.
The _______ price in a housing market is the price at which the quantity of homes demanded (the number that people want to own) and quantity supplied (the housing stock) are equal.
Equilibrium
Overtime, in most housing markets, both the supply and demand curves will shift ____________.
Rightward
When the housing stock grows at the same rate as housing demand, housing prices ______________.
Remain unchanged
WHen home prices rise especially rapidly, we know that increases in demand must be outpacing increasing in supply.
True.
What are some factors that could cause the demand curve for housing to being shifting rightward more rapidly that in the past?
Population growth, anticipated gains, changes in expectations
What is Capital gain?
The gain to the owner of an asset when it is sold for a price higher than its original purchase price.
What is capital loss?
THe loss to the owner of an asset when ti is sold for a price lower than its original purchase price.
A home is the most _______ financial investments that most people ever make.
Leveraged
________ magnifies the impact of a price change on the rate of return you will get from the asset.
Leverage
With higher housing prices, construction firms will have an incentive to increase building. Unless restrictions prevent them from doing so, the housing stock will rise at a faster rate-- in future years.
Eventually, the housing stock can catch up to the higher demand, but that will happen much later. In the meantime, the main impact of the rapid increase in demand is higher home prices.
When the demand for housing begins rising faster than previously, the housing stock typically lags behind, and housing prices rise.
Rise
The rapid rise in housing prices- especially after 2001, has been described as a housing _________. The term _________ suggests something that is destined to burst.
Bubble, bubble
What caused demand to increase so rapidly during this period of the housing bubble?
Economic growth, Interest rates, government policy, financial innovations, lending standards, and speculation
Economy was growing during the housing bubble. Higher incomes increased the demand.
Confidence about the future.
Beginning in 2001, interest rates on many types of loans trended downward, including the interest rate on mortgage loans. What is the reason for this general decline in interest rates?
It is controversial. Fed policy and global financial forces played a role-- decline in interest rates was observed in other countries as well.
When interest rates drop, owning a home is less costly.
The general drop in interest rates contributed to the rightward shift in the demand for housing.
Government policy effect on the increase for housing? (housing bubble) These policies have been in place for decades, so they cannot explain the housing boom but it did help.
Gov allows homeowners to deduct mortgage interest payments from their taxable income. This amounts to a subsidy. Second, government agencies have increased the funds available for mortgage lending by purchasing mortgages from banks and other financial institutions giving them cash to led out again for another mortgage. (All because the government wants people to buy homes-- good for the domestic economy) The resulting increase in funding for mortgages has helped to keep mortgage interest rates low. Gov also raised the capital gains exclusion ion home sales. meant that the first 500,000 of capital gains from selling a home would be entirely tax free.
What kinds of financial innovations effected the housing boom?
1. The adjustable rate mortgage (ARM), offered a very low interest rate and low monthly payments-initially. 2. Typically, a mortgage lender would hold onto a mortgage and collect the monthly payments from the homeowner-30 years. Innovation- new ways for lenders to quantify the risks of an individual mortgage called "credit scoring: so they could then quantify the risk of a mortgage backed security. Banks in the US bought hundreds of billions of collard of these new securities each year. Therefore, mortgage interest rates fell.
How have lending standards changed? Traditionally, lenders have guarded against homeowner defaults ion two ways: 1. Lending only to those whose incomes and credit histories suggest a small probability of default; and 2. requiring the borrower to make a sizable down payment--traditionally 20% of the home's value.
However, as the boom proceeded, lending standards deteriorated. Lenders made more and more so-called subprime loans.
What are subprime loans?
Loans to borrowers who previously would not have qualified due to low or unstable incomes or bad credit histories. Causes rightward shift of the demand curve-- more people buy homes that did not previously qualify.
How did speculation contribute to the housing boom?
Once housing prices had increased rapidly for several years, and people began expecting them to keep rising at those rates. People bought more houses: it was affordable. Could sell them for capital gain.
THe US housing markets, problems began to occur in mid 2006 largely due to two simultaneous occurrences:
1.) Oil and gasoline prices spiked, so many new homeowners are having difficulty making their months mortgage payments, and 2.) Interest rates on a large group of adjustable rate mortgages reset to higher levels
The ____________ begun in early 2009, provided incentives for banks an homeowners to renegotiate mortgage agreements and prevent foreclosures.
Making Home Affordable Program. Other programs offered additional tax benefits to new home buyers. THese programs were want to offer some financial relief to struggling families.
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