AP Economics Chapter 6-7

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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
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
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
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

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