40 Questions
What is a price ceiling?
A maximum price that sellers may charge for a good
What is queuing?
A nonprice rationing mechanism where people wait in line
What is the main problem with alternative rationing mechanisms?
They are susceptible to favored customers and black markets
What is a black market?
A market in which illegal trading takes place at market-determined prices
What is the quantity supplied of concert seats at the Staples Center?
20,000 seats
At what price will the quantity demanded equal the quantity supplied for concert seats at the Staples Center?
$300 per ticket
What is rationing?
A process of distributing goods and services through nonprice mechanisms
What is the purpose of ration coupons?
To limit the quantity of goods that individuals can purchase
What is the primary reason governments and private firms decide to use alternative rationing mechanisms?
To ensure fairness in the distribution of goods
What is the outcome of attempts to bypass price rationing in the market?
Such attempts distribute costs and benefits among households in unintended ways
What is the main purpose of the Organization of the Petroleum Exporting Countries (OPEC)?
To produce one-third of the world's oil
What is the result of imposing a maximum price of $0.57 per gallon of leaded regular gasoline?
A shortage of gasoline
What is the effect of a price ceiling on the quantity demanded and supplied?
The quantity demanded exceeds the quantity supplied
What would have been the result if the price of gasoline had been set by the interaction of supply and demand?
The price of gasoline would have increased to approximately $1.50 per gallon
What is an alternative rationing system that occurred in response to the OPEC embargo?
A queuing system
What is the main reason why governments and private firms use alternative rationing mechanisms?
To ensure fairness and efficiency
What is the primary consequence of a price change resulting from a shift in demand in an output market?
A change in the allocation of resources
What is the purpose of a price floor, such as a minimum wage?
To regulate the exchange of goods and services below a certain price
What is the primary effect of a tariff on the domestic market?
An increase in the price of domestic goods
What would be the result of a 33.33% tax on crude oil in the United States?
A decrease in the quantity demanded of crude oil
What is the primary driver of the allocation of resources in an economy?
Supply, demand, and prices in input and output markets
What is the relationship between profits and capital investment?
Profits attract capital and encourage investment
What is the primary effect of a higher wage on the labor market?
An increase in the demand for labor
What is the primary purpose of supply and demand analysis?
To analyze the allocation of resources in an economy
What is the primary benefit to consumers when they purchase a product at its market price?
They receive a consumer surplus, which is the difference between the maximum amount they are willing to pay and the market price
What is the graphical representation of the total consumer surplus?
The area of the shaded triangle in panel (b) of Figure 4.6
What is the primary benefit to producers when they sell a product at its market price?
They earn a producer surplus, which is the difference between the market price and the cost of production
What is the graphical representation of the total producer surplus?
The area of the shaded triangle in panel (b) of Figure 4.7
What happens to consumer surplus when the market price of a good increases?
It decreases
What happens to producer surplus when the cost of production of a good decreases?
It increases
What is the relationship between the market price and the cost of production for a firm that earns a producer surplus?
The market price is greater than the cost of production
What is the term for the difference between the maximum amount a person is willing to pay for a good and its current market price?
Consumer surplus
What is the primary reason why competitive markets are considered efficient?
Because they produce what people want at the least cost
What is the term for the total loss of producer and consumer surplus from underproduction or overproduction?
Deadweight loss
What happens to the total producer and consumer surplus when the supply and demand curves intersect at equilibrium?
It is increased
Which of the following is a potential cause of deadweight loss from underproduction?
Monopoly power
What is the result of producing 10 million hamburgers per month instead of 7 million hamburgers per month?
A deadweight loss equal to the area of triangle ABC
What is the effect of external costs such as pollution and congestion on the market?
They lead to both under- and overproduction of some goods
What is the purpose of the market/price system?
To produce what people want at the least cost
What happens to the total producer and consumer surplus when there is underproduction or overproduction?
It decreases
Study Notes
Constraints on the Market and Alternative Rationing Mechanisms
- Governments and private firms may use alternative rationing mechanisms to control the distribution of goods and services when there is excess demand at the current price.
- These mechanisms are often justified in the name of fairness, but they can be difficult to implement and may have unintended consequences.
The Oil Embargo and Price Ceiling
- In 1973 and 1974, the Organization of the Petroleum Exporting Countries (OPEC) imposed an embargo on oil shipments to the United States, leading to a shortage of gasoline.
- The US government responded by imposing a maximum price of $0.57 per gallon of leaded regular gasoline, creating a price ceiling that led to a shortage of gasoline.
Alternative Rationing Mechanisms
- Alternative rationing mechanisms include:
- Queuing: waiting in line to obtain a good or service
- Favored customers: receiving special treatment from dealers during times of excess demand
- Ration coupons: tickets or coupons that entitle individuals to purchase a certain amount of a good or service
- Black markets: illegal markets where goods and services are traded at market-determined prices
Rationing Mechanisms for Concert and Sports Tickets
- Alternative rationing mechanisms can be used to distribute goods and services, such as concert and sports tickets, but they can lead to unfair outcomes and black markets.
Prices and the Allocation of Resources
- Price changes in output markets can lead to changes in profits and losses, which can affect the allocation of resources and the combinations of goods and services produced.
- Higher wages can attract labor and encourage workers to acquire skills.
Price Floors and Ceilings
- A price floor is a minimum price below which exchange is not permitted, while a price ceiling is a maximum price that can be charged.
- Examples of price floors include minimum wages, while price ceilings can lead to shortages or surpluses.
Supply and Demand Analysis: Tariffs
- Supply and demand analysis can be used to understand the effects of tariffs (taxes on imported goods) on the market.
- Imposing a tariff can increase the world price of a good, leading to a decrease in quantity demanded and an increase in domestic production.
Supply and Demand and Market Efficiency
- Supply and demand curves can be used to illustrate market efficiency, which can be understood through the concepts of consumer and producer surplus.
- Consumer surplus is the difference between the maximum amount a person is willing to pay for a good and its current market price.
- Producer surplus is the difference between the current market price and the cost of production for the firm.
Total Producer and Consumer Surplus
- The total producer and consumer surplus is greatest when the supply and demand curves intersect at equilibrium.
- Underproduction or overproduction can lead to a deadweight loss, which is the total loss of producer and consumer surplus.
Deadweight Loss
- Deadweight loss can occur when the market does not produce at the equilibrium level, leading to a loss of efficiency and a decrease in total producer and consumer surplus.
Potential Causes of Deadweight Loss
- Market failure can occur due to various factors, including:
- Monopoly power
- Taxes and subsidies
- External costs such as pollution and congestion
- Artificial price floors and price ceilings
This quiz explores the scenarios where governments and private firms use alternative mechanisms to ration items in excess demand, and the policies designed to prevent price rationing.
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