Econ 2106 UGA Test 2- Kuchibhotla Study Guide
Surplus - ANSWER excess supply
Consumer surplus - ANSWER the difference between what consumers would be
willing to pay and the market price
willingness to pay - ANSWER the maximum price at which a customer would buy
a good
Producer surplus - ANSWER the difference between market price and the price
at which firms are willing to supply the product
Total producer surplus from sales of a good at a given price is the area ____ the
supply curve but ____ below the price - ANSWER Above; Below
total surplus - ANSWER the sum of producer and consumer surplus
Interference in market distorts... - ANSWER price signals causing resources to
be misallocated
-legal restrictions on market prices
2 types of price controls/interference - ANSWER price ceilings and price floors
Price ceiling - ANSWER a maximum price sellers are allow to charge for a good
or service (usually set BELOW equilibrium
price floor - ANSWER a minimum price buyer are required to pay for a good or
service (usually set ABOVE equilibrium)
Price ceilings Example - ANSWER -gasoline prices are skyrocketing
-price cap is in place to not ruin economy
Price ceilings side effects - ANSWER -Dead weight loss from inefficiently low
quantity
-inefficient allocation to customers
-wasted resources
-inefficiently low quality
-black markets
When prices are held below the market price, shortages are created - ANSWER
the lower the controlled price relative to the market equilibrium price, the larger
the shortage
, Deadweight loss - ANSWER the loss in total surplus that occurs whenever an
action or a policy reduces the quantity transacted below the efficient market
equilibrium quantity
Inefficient allocation to customers - ANSWER -price controls distort signals that
would help the goods get allocated to their highest-valued uses
-at the controlled price, sellers have more customers than goods
-in a free market, this would be an opportunity to profit by raising prices, but
when prices are controlled, sellers cannot
Wasted resources - ANSWER price controls that create shortages lead to
bribery and wasteful lines
Shortages - ANSWER not all buyers will be able to purchase the good
black Market - ANSWER a market in which goods or services are bought and
sold illegally, either because they are prohibited or because the equilibrium
price is illegal
Why have price ceilings? - ANSWER -they do benefit some people (who are
typically better organized and more vocal than those who are harmed by them)
-if the price ceilings is longstanding, buyers may not have a realistic idea or
what would happen without it
-government officials often do not understand supply and demand analysis
Price floors - ANSWER sometimes governments intervene to push market prices
up instead of down
Price floor Example - ANSWER minimum wage, agricultural goods (milk), Air
fares (pre 1980s)
Non-binding price floor - ANSWER If a price floor is set below equilibrium, it will
have no effect
Binding price floor - ANSWER Only price floor that forces price above
equilibrium will have any effect
Effective price floor - ANSWER surplus
Price floors cause predictable side effects - ANSWER -deadweight loss from
inefficiently low quantity
-inefficient allocation of sales among sellers
-wasted resources
-inefficiently high quality
-temptation to break the law by selling below legal price
Surplus - ANSWER excess supply
Consumer surplus - ANSWER the difference between what consumers would be
willing to pay and the market price
willingness to pay - ANSWER the maximum price at which a customer would buy
a good
Producer surplus - ANSWER the difference between market price and the price
at which firms are willing to supply the product
Total producer surplus from sales of a good at a given price is the area ____ the
supply curve but ____ below the price - ANSWER Above; Below
total surplus - ANSWER the sum of producer and consumer surplus
Interference in market distorts... - ANSWER price signals causing resources to
be misallocated
-legal restrictions on market prices
2 types of price controls/interference - ANSWER price ceilings and price floors
Price ceiling - ANSWER a maximum price sellers are allow to charge for a good
or service (usually set BELOW equilibrium
price floor - ANSWER a minimum price buyer are required to pay for a good or
service (usually set ABOVE equilibrium)
Price ceilings Example - ANSWER -gasoline prices are skyrocketing
-price cap is in place to not ruin economy
Price ceilings side effects - ANSWER -Dead weight loss from inefficiently low
quantity
-inefficient allocation to customers
-wasted resources
-inefficiently low quality
-black markets
When prices are held below the market price, shortages are created - ANSWER
the lower the controlled price relative to the market equilibrium price, the larger
the shortage
, Deadweight loss - ANSWER the loss in total surplus that occurs whenever an
action or a policy reduces the quantity transacted below the efficient market
equilibrium quantity
Inefficient allocation to customers - ANSWER -price controls distort signals that
would help the goods get allocated to their highest-valued uses
-at the controlled price, sellers have more customers than goods
-in a free market, this would be an opportunity to profit by raising prices, but
when prices are controlled, sellers cannot
Wasted resources - ANSWER price controls that create shortages lead to
bribery and wasteful lines
Shortages - ANSWER not all buyers will be able to purchase the good
black Market - ANSWER a market in which goods or services are bought and
sold illegally, either because they are prohibited or because the equilibrium
price is illegal
Why have price ceilings? - ANSWER -they do benefit some people (who are
typically better organized and more vocal than those who are harmed by them)
-if the price ceilings is longstanding, buyers may not have a realistic idea or
what would happen without it
-government officials often do not understand supply and demand analysis
Price floors - ANSWER sometimes governments intervene to push market prices
up instead of down
Price floor Example - ANSWER minimum wage, agricultural goods (milk), Air
fares (pre 1980s)
Non-binding price floor - ANSWER If a price floor is set below equilibrium, it will
have no effect
Binding price floor - ANSWER Only price floor that forces price above
equilibrium will have any effect
Effective price floor - ANSWER surplus
Price floors cause predictable side effects - ANSWER -deadweight loss from
inefficiently low quantity
-inefficient allocation of sales among sellers
-wasted resources
-inefficiently high quality
-temptation to break the law by selling below legal price
