Economics: Supply, Demand, and Price Controls
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Questions and Answers

What effect does a binding price floor have on market outcomes?

  • It eliminates surplus in the market.
  • It reduces prices below equilibrium.
  • It allows the market to adjust to equilibrium price.
  • It leads to a surplus due to quantity supplied exceeding quantity demanded. (correct)

Which of the following best defines a price floor?

  • The average price a product is sold for in a competitive market.
  • A contractual price agreed upon by buyers and sellers.
  • The minimum price at which a good or service can be sold. (correct)
  • A maximum allowable price set by the government.

What happens to the price of ice-cream cones when a binding price floor is set above the equilibrium price?

  • The market price drops to the equilibrium price.
  • Sellers reduce their supply of ice-cream cones.
  • Consumers purchase more ice-cream cones.
  • The price remains constant at the floor price. (correct)

In the context of labor, what is an example of a price floor?

<p>Minimum wage laws. (C)</p> Signup and view all the answers

Which outcome is most likely when a price floor is not binding?

<p>Supply and demand can adjust to the equilibrium price. (A)</p> Signup and view all the answers

When demand is more price elastic than supply, who bears more of the tax burden?

<p>Sellers (C)</p> Signup and view all the answers

What is a price ceiling?

<p>A legal maximum price for a good or service (B)</p> Signup and view all the answers

How does a tax on a good affect the equilibrium quantity of that good?

<p>Decreases the equilibrium quantity (D)</p> Signup and view all the answers

What does the incidence of a tax depend on?

<p>The price elasticities of supply and demand (A)</p> Signup and view all the answers

Which of the following is NOT an example of a price floor?

<p>Rent control (C)</p> Signup and view all the answers

What is the effect of a binding price ceiling on a market?

<p>It creates a shortage because quantity demanded exceeds quantity supplied. (B)</p> Signup and view all the answers

What characterizes a price ceiling that is not binding?

<p>It does not affect the market price. (A)</p> Signup and view all the answers

What is a price floor?

<p>A legal minimum on the price at which a good can be sold. (A)</p> Signup and view all the answers

When does a price ceiling create a shortage?

<p>When it is set below the equilibrium price. (C)</p> Signup and view all the answers

Which role do economists play concerning government policies?

<p>They assist in developing policies using their theories. (D)</p> Signup and view all the answers

What happens when the market price is considered unfair by policymakers?

<p>Price ceilings or floors may be enacted. (B)</p> Signup and view all the answers

What does a price ceiling above the equilibrium price indicate?

<p>It is not binding and has no market effect. (B)</p> Signup and view all the answers

What is one outcome of introducing a binding price ceiling in a market?

<p>It leads to a situation where quantity demanded exceeds quantity supplied. (A)</p> Signup and view all the answers

What is the primary goal of rent control policies?

<p>To help the poor by making housing more affordable (B)</p> Signup and view all the answers

According to the case study, what happens to the market when rent controls are imposed in the short run?

<p>A shortage of housing units occurs (C)</p> Signup and view all the answers

What is a potential negative consequence of rent control according to economists?

<p>Destruction of city infrastructure (A)</p> Signup and view all the answers

What happens to the price floor if it is set below the equilibrium price?

<p>It is considered non-binding (A)</p> Signup and view all the answers

How does the elasticity of supply and demand change in the long run when rent controls are applied?

<p>They become more price elastic (D)</p> Signup and view all the answers

In the context of price floors, what does a binding price floor result in?

<p>A surplus of goods in the market (C)</p> Signup and view all the answers

What is an example of non-price rationing that may occur due to rent controls?

<p>Long wait times for housing (B)</p> Signup and view all the answers

What might a lack of demand for housing under rent control policies indicate?

<p>Housing quality may be declining (B)</p> Signup and view all the answers

What happens to the quantity sold of a good when it is taxed?

<p>It decreases. (B)</p> Signup and view all the answers

How is the tax burden typically shared between buyers and sellers?

<p>Buyers and sellers share the tax burden. (A)</p> Signup and view all the answers

What determines how the burden of a tax is divided between buyers and sellers?

<p>Price elasticity of demand and supply. (D)</p> Signup and view all the answers

What typically occurs when supply is more price elastic than demand?

<p>Tax incidence falls more heavily on consumers. (C)</p> Signup and view all the answers

What is the effect of inelastic demand on the incidence of tax?

<p>It causes consumers to bear most of the tax burden. (B)</p> Signup and view all the answers

How does a tax wedge affect wages?

<p>It causes a decrease in wages received by workers. (A)</p> Signup and view all the answers

What typically happens to market activity as a result of taxation?

<p>It faces discouragement. (D)</p> Signup and view all the answers

When tax incidence falls more heavily on consumers, what characteristic do you expect from the demand curve?

<p>It is inelastic. (A)</p> Signup and view all the answers

What effect does a minimum wage have on the labor market?

<p>It increases the equilibrium wage. (A), It creates a labor surplus. (C)</p> Signup and view all the answers

How does a tax on sellers generally affect market activity?

<p>It discourages market activity. (A)</p> Signup and view all the answers

What is tax incidence concerning market participants?

<p>It describes how the burden of tax is distributed among market participants. (D)</p> Signup and view all the answers

What is the immediate impact of a tax levied on sellers of a product?

<p>The supply curve shifts upward. (C)</p> Signup and view all the answers

What typically happens to prices paid by buyers when a tax is imposed on goods?

<p>Prices increase. (D)</p> Signup and view all the answers

What happens to sellers' revenue when a tax is imposed on their products?

<p>Sellers receive less than before. (B)</p> Signup and view all the answers

What is a primary consequence of imposing a minimum wage in the labor market?

<p>It leads to higher rates of unemployment. (A)</p> Signup and view all the answers

How does the elasticity of demand affect tax incidence?

<p>Less elastic demand results in a higher tax burden on consumers. (A)</p> Signup and view all the answers

Flashcards

Price Controls

Government intervention aimed at influencing market prices, often enacted when policymakers believe market prices are unfair to consumers or producers.

Price Ceiling

A legal maximum price at which a good or service can be sold. It is set below the equilibrium price.

Price Floor

A legal minimum price at which a good or service can be sold. It is set above the equilibrium price.

Shortage

When a price ceiling is set below the equilibrium price, leading to a situation where the quantity demanded exceeds the quantity supplied.

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Non-Binding Price Ceiling

When a price ceiling is set above the equilibrium price, it has no effect on the market because the market price naturally settles below the ceiling.

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Government Policies

Government interventions that aim to establish equilibrium prices and quantities in a free market.

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Equilibrium Conditions

The point where supply and demand intersect, resulting in a stable price and quantity exchanged.

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Market Inefficiencies

Situations where equilibrium prices and quantities are not considered fair or efficient, leading to government intervention through policies.

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Rent Control

A government policy that sets a maximum price landlords can charge for renting a property.

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Housing Shortage

A situation where the quantity supplied of a good is less than the quantity demanded, often due to price controls like rent control.

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Rent Control's Goal

Rent control's primary goal is to make housing more affordable for low-income individuals by setting limits on rental prices.

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Price Inelasticity

When supply and demand are relatively unresponsive to price changes in the short term, meaning that price changes have a limited impact on the quantity supplied or demanded.

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Price Elasticity

When supply and demand are sensitive to price changes in the long term, meaning that price changes significantly affect the quantity supplied or demanded.

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Binding Price Floor

A price floor that is set above the equilibrium price, resulting in a surplus of the good or service.

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Non-Binding Price Floor

A price floor that is set below the equilibrium price, having no real impact on the market because the market price is already higher.

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Minimum Wage

A legal minimum wage set by the government for workers' hourly pay. Employers cannot legally pay workers less than this amount.

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Surplus

The quantity of a good or service supplied exceeds the quantity demanded at the price floor. This happens when a price floor is binding.

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Tax Incidence

The burden of a tax falls more heavily on the side of the market that is less price elastic.

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Tax Incidence: Elastic Demand

When demand is more price elastic than supply, the price buyers pay increases by a smaller amount than the price sellers receive after the tax.

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Tax Incidence: Elastic Supply

When supply is more price elastic than demand, the price sellers receive decreases by a smaller amount than the price buyers pay after the tax.

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Tax Impact on Equilibrium

Taxes levied on goods or services reduce the equilibrium quantity traded in the market. Essentially, the tax wedge narrows the gap between what buyers pay and what sellers receive.

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Purpose of Taxes

Tax revenue generated by the government is primarily used to fund public services and projects. These services are generally considered beneficial to society.

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Equilibrium

The point where the quantity supplied equals the quantity demanded, resulting in a stable price and quantity exchanged.

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Price buyers pay

The price that buyers pay for a good or service after a tax has been imposed.

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Price sellers receive

The price that sellers receive for a good or service after a tax has been imposed.

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Consumer tax burden

The portion of a tax burden that is borne by consumers.

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Producer tax burden

The portion of a tax burden that is borne by producers.

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Minimum Wage Impact

A minimum wage set above the equilibrium wage results in a surplus of labor, meaning more people are willing to work than employers are willing to hire.

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Tax on Sellers Effect

Taxes on sellers shift the supply curve upward, resulting in a higher price for buyers and a lower price received by sellers. This reduces the quantity traded in the market.

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Elasticity and Tax Incidence

The price elasticity of supply and demand determines how much the burden of a tax is shared between buyers and sellers. A more inelastic side of the market bears a larger proportion of the tax.

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Tax Shifting Supply Curve

A tax on sellers effectively shifts the supply curve upwards by the amount of the tax, leading to a higher equilibrium price and a lower equilibrium quantity.

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Study Notes

Supply, Demand, and Government Policies

  • Market forces in unregulated markets establish equilibrium prices and exchange quantities.
  • Equilibrium conditions may be efficient, but not everyone may be satisfied.
  • Economists use theories to develop policies to address market issues.

Controls on Prices

  • Price controls are enacted when policymakers believe market prices are unfair to buyers or sellers.
  • Government-created price ceilings and floors result.

Price Ceiling

  • A legal maximum price at which a good can be sold.

Price Floor

  • A legal minimum price at which a good can be sold.

How Price Ceilings Affect Market Outcomes

  • A non-binding price ceiling is set above the equilibrium price.
  • A binding price ceiling is set below the equilibrium price, creating shortages.

How Price Floors Affect Market Outcomes

  • A non-binding price floor is set below the equilibrium price.
  • A binding price floor is set above the equilibrium price, creating surpluses.

The Minimum Wage

  • Minimum wage laws establish the lowest price for labor that employers may pay. This is an example of a price floor.

Taxes

  • Governments use taxes to fund public projects.
  • Taxes on goods decrease the quantity sold.
  • Buyers and sellers share the tax burden.

Price Elasticity and Tax Incidence

  • Tax incidence is the manner in which the burden of a tax is shared among market participants.
  • Taxes change market equilibrium.
  • Buyers pay more, sellers receive less, regardless of who pays the tax.
  • Tax incidence depends on the price elasticity of supply and demand.
  • The burden falls on the side of the market that is less price elastic.

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Supply, Demand, and Government Policies PDF

Description

This quiz explores the concepts of supply, demand, and how government policies influence market prices through controls like price ceilings and floors. Understand the effects of these controls on market outcomes, including shortages and surpluses. Test your knowledge on these key economic principles.

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