AP Economics Chapter 6-7

price ceiling the legislated maximum of price price floor the legislated minimum of price binding& not binding binding- when the price ceiling or price floor has effect on the market not binding-when the price ceiling or price floor has no effect on the market When the government imposes a binding price ceiling on a competitive market a shortage of the good arises, and sellers must ration the scarce goods among the large number of potential buyers. Two factors of inefficiency caused by price celing 1.long lines waste buyers' time 2.Discrimination according to seller bias(the good does not necessarily go to the buyer who values it most highly) rent control places a ceiling on rents that landlords may charge their tenants. the effect of binding price floor and binding price ceiling binding price ceiling causes shortage binding price floor causes surplus long run effect of rent control 1.supply decreases because landlords are less willing to offer more apartments or maintain the existing ones 2.demand increases because low rents encourage more people to find their own apartment 3. Shortage occurs, number of people without apartment increases 4. conditions of apartments deteriorate minimum-wage laws dictate the lowest price for labor that any employer may pay the impact of minimum-wage Highly skilled and experienced workers are not affected because their equilibrium wages are well above the minimum.(It is not binding for them) It has its greatest impact on the market for teenage labor and least-experienced workers. long-term effect of minimum-wage 1.Company hires less workers 2. Encourage teenagers to drop out of school 3. Prevent some unskilled workers from getting the on-the-job training they need Thus causes high unemployment wage subsidies's positive and negative effect Positive:Won't hurt those they are trying to help in long term. Negative: Cost the government money, therefore, require higher taxes. which term refers to how the burden of a tax is distributed among the various people who make up the economy? tax incidence tax wedge the difference between the price buyers paid and the price sellers receive elasticity and tax incidence a tax burden falls more heavily on the side of the market that is less elastic(more vertical) Chapter 7 Consumers, producers, and the efficiency of markets willingness to pay measures how much that buyer values the good consumer surplus the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it marginal buyer the buyer who would leave the market first if the price were any higher how to measure the consumer surplus in a market the area below the demand curve and above the price measures the consumer surplus in a market producer surplus measures the benefit sellers receive from participating in a market how to calculate producer surplus the area above supply curve and below the price total surplus =consumer surplus+producer surplus =value to buyers-cost to sellers If an allocation of resources maximizes total surplus, we say that the allocation exhibits efficiency equility concerns whether the various buyers and sellers in the market have a similar level of economic well-being. free markets 1.allocate the supply of goods to the buyers who value them most highly, as measured by their willingness to pay 2.allocate the demand for goods to the sellers who can produce them at the lowest cost 3.produce the quantity of goods that maximizes the sum of consumer and producer surplus The equilibrium outcome is an efficient allocation of resources Policy of leaving well enough alone goes by the French expression: laissez faire laissez faire allow them to do In free market, what does the planner's job? Adam Smith's invisible hand of the marketplace market power the ability to influence price can cause markets to be inefficient because it keeps the price and quantity away from the equilibrium of supply and demand externalities side effects in market except the decisions of buyers and sellers market failure the inability of some unregulated markets to allocate resources efficiently example: market power, externalities