Economics I Chapter 4 – Flashcards
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What two jobs does price?
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(1) as a rationing device and (2) as a transmitter of information."
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Why is price a better rationing device than, for example, brute force or first come first served?
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Even though it could be said that dollar price does discriminate against the poor, every rationing device discriminates against someone and price is the least of those. Also, if anything else was the rationing device there would be little or no incentive for the suppliers to make the goods.
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How does price transmit information?
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Price is a transmitter of information that relates to the relative scarcity of a good.
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Why do we need a rationing device like price?
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A rationing device—such as dollar price—is needed because scarcity exists and as a reult of scarcity, a rationing device is needed to determine who gets what of the available limited resources and goods.
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Price Ceiling
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A government-mandated maximum price above which legal trades cannot be made."
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If the amount of a price ceiling is below the equilibrium price of good what can happen?
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1. shortages 2. fewer exchanges 3. nonprice-rationing devices 4. buying and selling
at prohibited prices 5. tie- in sales.
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If price ceiling is less than the equilibrium price then
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quantity demanded > quantity supplied.
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How can price transmit false information?
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Price ceilings (that are below the equilibrium price) distort the flow of accurate information to buyers. Buyers get a false view of reality; they then base their buying behavior on incorrect information.
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What is potential unintended effect of price ceilings?
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A price ceiling policy intended to lower prices for the poor may cause shortages, the use of nonprice rationing devices, illegal market transactions, and tie-in sales.
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Price floor
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A government-mandated minimum price below which legal trades cannot be made.
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If the price floor is above the equilibrium price, what two effects can arise?
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1. surpluses 2. fewer exchanges
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If I price floor is higher than the equilibrium price
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quantity supplied >than the quantity demanded
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Why are surpluses usually temporary?
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When a surplus exists, price and output tend to fall to equilibrium.
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What can prevent a surplus from being temporary?
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The surplus cannot correct itself because it is unlawful to trade at the equilibrium price.
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What effect does setting kidney and other organs at a price ceiling of 0 by outlawing the sale of organs for transplant?
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There are more people on national lists wanting a kidney than there are kidneys available. Some of these people die waiting for a transplant -- the worst kind of shortage.
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Minimum wage is an example of
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a price floor
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If the demand for labor is downward sloping and the labor market is competitive, how will a minimum wage that is above the equilibrium wage affect employment? This is a question about?
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At higher wages, the quantity demanded of labor, or the employment level, will be lower than at lower wages." The word "lower" speaks to the directional change in employment.
The direction of Movement.
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Under the above scenario, how much will employment decline? This is a question about?
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We would have to collect employment figures at the equilibrium wage and at the minimum wage and then find the difference to answer this.
The magnitude.
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A price floor effectively transfers some of the __________________to a _______________
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consumers'
producers' surplus.
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Deadweight Loss
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The loss to society of not producing the competitive, or supply-and- demand-determined, level of output.
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Why do people who argue that a price floor creates a situation in which (1) someone wins and someone loses and (2) the gains for the winner are equal to the losses for the loser, have an invalid argument?
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The losses (for consumers) are not offset by the gains (for producers), instead a price ceiling ends with a net loss, or deadweight loss.
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Absolute (Money) Price
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The price of a good in money terms.
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Relative Price
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The price of a good in terms of another good
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What is the relative price of a car (in terms of computers)
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Absolute price of a car/Absolute price of a computer
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What wouldn't a tax on sugary soda reduce obesity?
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Even though a tax, reduces the consumption of sugary soda, it does not change price of other substitutes with just as many calories, so obesity will not go down.
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"In short, if the absolute price of a good rises and nothing else changes, then ____________________
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relative price rises too
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"conomists know that a gHow can a good go up in price at the same time as it becomes relatively cheaper?
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If the absolute price of a good rises and at the same time that the absolute price of a a substitute good rises by more than that good the relative price of the good could fall.
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Can a government imposed tax on one good effect the relative price of the good?
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Yes, if the tax is only on one good then the tax effectively raises the price the consumer pays for the good relative to its substitute good.
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Do consumers always prefer lower prices?
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Only if nothing else changes because if lower prices are the result of price ceilings shortages and long lines of could occur, causing people to perhaps not prefer lower to higher prices
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What is a "Tie-in Sale
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A sale whereby one good can be purchased only if another good is also purchased.
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If price were outlawed as the rationing device (used in markets), there would be no need for another rationing device to take its place. We would have reached utopia." Discuss.
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This is not true. Scarcity will always exists so a need for a rationing device will always be needed. Another device, such as brute force, would have to take the place of price.
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Think of ticket scalpers at a rock concert, a baseball game, and an opera. Might they exist because the tickets to these events were originally sold for less than the equilibrium price? Why or why not? In what way is a ticket scalper like and unlike your retail grocer, who buys food from a wholesaler and then sells it to you?
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They could be....selling at less than equilibrium price would cause demand to skyrocket and could cause a shortage which would make scalpers successful at selling tickets at increased rate.
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James lives in a rent-controlled apartment and has for the past few weeks been trying to get the supervisor to fix his shower. What does waiting to get one's shower fixed have to do with a rent-controlled apartment?
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In a rent controlled apartment, the owner of the building receives less from renters than they could in a free market and will try to maximize profits by putting off repairs and incurring more expenses.
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Explain why fewer exchanges are made when a disequilibrium price (below equilibrium price) exists than when the equilibrium price exists.
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If a price is set below equilibrium, fewer suppliers want to supply the good at that price leve, thus decreases the number of exchanges.
