Price ceiling price cap a government regulation that makes it illegal to charge a price higher than a specified level Price ceiling set above the equilibrium price has no effect the price ceiling does not constrain the market forces Price ceiling below the equilibrium price has powerful effects on a market the price ceiling attempts to prevent the price from regulating the quantities demanded and supplied Rent ceiling a price ceiling on the housing market A rent ceiling set below equilibrium leads to a housing shortage increased search activity a black market Housing shortage At equilibrium price quantity of houses supplied quantity of houses demanded When rent price is below the equilibrium rent the quantity of houses demanded exceeds houses supplied shortage This leads to a larger competition among demanders and increased search activity Increased Search Activity Black Market Inefficiency of a rent ceiling Are rent ceilings fair Search activity the time spent looking for someone with whom to do business Opportunity cost of a good the price and the value of the search time spent finding the good o i e using gas to check out various apartments the cost of increased search activity might end up making the full cost of housing higher than it would be without the rent ceiling black market an illegal market in which the equilibrium price exceeds the price ceiling when a rent ceiling is in force frustrated renters and landlords seek ways of increasing rents o i e a new tenant pays a high price for worthless items charging 2000 for bad drapes If the rent ceiling is enforced loosely the black market rent is close to the unregulated rent with strict enforcement the black market rent is at the maximum price people will pay Can be measured by the dead loss plus the cost of resources used in increased search activity Fair rules anything that blocks voluntary exchange is unfair rent ceilings are unfair Fair result a fair outcome is one that benefits the less well off depends on allocation Rent adjustments make allocation of housing more scarce allocate scarce housing through other mechanisms such as lottery first come first served or discrimination Price floor a government imposed regulation that makes it illegal to charge a price lower than a specified level A price floor below the equilibrium price has no effect floor does not constrain market forces A price floor above the equilibrium price has powerful effects on market the price floor attempts to prevent the price from regulating the quantities demanded and supplied Minimum wage the price floor when applied to a labor market When it is set above the equilibrium wage creates unemployment At equilibrium level quantity of labor supplied quantity of labor demanded At a wage rate above the equilibrium quantity of labor supplied exceeds quantity of labor demanded Leads to a surplus of labor unemployment Minimum wage is unfair on both views of fairness Tax incidence the division of the burden of a tax between buyers and sellers Acts like an increase in cost so it decreases supply Buyers pay a certain amount and sellers lose a certain amount to the government Taxes Tax on sellers Tax on buyers Decreases demand and shifts demand curve leftward When a transaction is taxed there are two prices The price paid by buyers which includes the tax The price paid to sellers which excludes the tax Social security tax an example of a tax that congress imposes equally on both buyers and sellers The division of the burden of a tax between buyers and sellers depends on the elasticities of demand and supply Perfectly inelastic demand buyers pay the entire tax the more inelastic the demand the larger is the amount of tax paid by buyers Perfectly elastic demand sellers pay the entire tax Tax incidence and elasticity of supply Perfectly inelastic demand sellers pay the entire tax Perfectly elastic demand buyers pay the entire tax the more elastic the supply the larger is the amount of the tax paid by buyers Price buyers pay is also the buyers willingness to pay which measures marginal social benefit Price sellers receive is also the sellers minimum supply price which equals marginal social cost A tax makes marginal social benefit exceed marginal social cost shrinks the producer surplus and consumer surplus and creates a deadweight loss In order to find a new equilibrium draw a new supply curve that takes into account the tax New equilibrium intersection of supply curve with tax and demand curve Price that sellers receive as revenue intersection of original supply curve and point below new equilibrium Consumer surplus w tax lose money Producer surplus w tax lose money Government taxes make money Tax revenue is divided by the original equilibrium price to determine who pays what of the tax Buyers pay the entire tax when demand curve is vertical or the supply curve is horizontal Sellers pay the entire tax when demand curve is horizontal or the supply curve is vertical Scantron all multiple choice bring pencils Test Calculator People soft number 35 questions about 5 6 questions per chapter Chapter 5 only about 3 questions Concepts from chapter 1 Definition of economics first question 3 fundamental questions of economics Difference between macro and micro Definition of factors of production and the factors of production Land and human capital concepts Assumptions on which micro is built scarcity efficiency Concept of opportunity cost Chapter 2 PPF definition and interpretation of every point on the PPF Link between PPF and the opportunity cost Economic growth and factors that drive economic growth be able to depict points that show economic growth and why Understanding of gains from trade lemonade stand example Two PPFs of two countries or two people or two firms Compute absolute advantage or comparative advantage and compute opportunity cost Chapter 3 Demand and supply definitions Definition of quantity demanded and quantity supplied Difference between demand and quantity demanded between supply and quantity supplied Law of demand and supply Factors that shift demand curve Definition of equilibrium Concept of shortage and surplus Factors that shift supply curve making predictions based on a story Making predictions effecting consumers or producers what will happen to the market Chapter 4 Elasticity Price elasticity of demand Income elasticity Cross elasticity Elasticity of supply Chapter 5 6 Remember formulas and interpreatations of coefficients of elasticity and