ECON 208 Chapter Notes - Chapter 5: Economic Equilibrium, Efficient-Market Hypothesis, Free Market

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ECON 208 Full Course Notes

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Chapter 5 price controls and market efficiency (to print) Government control the price at which a product must be bought and sold in the domestic market. In a free market, the equilibrium price equates the quantity demanded with the quantity supplied --> government price controls are policies that attempt to hold the price at some disequilibrium value. Government price controls: policies that attempt to hold the price at some disequilibrium value. Some controls hold the market price below its equilibrium thus creating a shortage at the controlled price. Some controls hold price about equilibrium this creating surplus at the controlled price. If quantity demanded is less than quantity supplied, demand will determine the amount actually exchanged. If quantity demanded exceeds quantity supplied, supply with determine the amount actually exchanged. At any disequilibrium price, quantity exchanged is determined by the lesser of quantity demanded or quantity supplied. Minimum permissible price that can be charged for a particular good or service.

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Task 2: Interpreting Graphs

The student will identify and explain specific effects of price controls at given prices.

Using the hypothetical information in the table on the market for gasoline, complete the following questions:

Price of Gasoline (per gallon)	Quantity Demanded (millions of gallons per week)	Quantity Supplied (millions of gallons per week)
$0.50	85	0
$1.00	75	15
$1.50	65	20
$2.00	55	25
$2.50	45	30
$3.00	35	35
$3.50	25	45
$4.00	15	55

Graph the demand and supply for gasoline using the myeconlab grapher software http://www.mathxl.com/info/grapher.aspx. Please start your graph at the origin and label each axis and each curve.

Screenshot instructions: To paste the graphed image on a Word document, press and hold âALT,â then press âPrtScrnâ while viewing the graphed image. Select a point on the Word document to paste the graph. Press and hold âCrtl,â then press âV.â

(Note: Change the numbers on each axis. Label each axis and each curve. Start your graph from the origin.)

Fill in the blanks highlighted in yellow.

B. The equilibrium price of gasoline is _________ and the equilibrium quantity is _____________.

C. The government imposes a price ceiling of $2.50 in this market. The prevailing price in this market is now _________. The quantity demanded is now _____________ and the quantity supplied is _____________.

D. The price ceiling results in a (SURPLUS OR SHORTAGE) _______________________ in the amount of _______________________.

Submission Requirements:

Attach a separate Word document for each task; all answers should be included in this document.

Myeconlab grapher software must be used for the graphed image.

A screen shot of the graphed image must be pasted to the Word document. Directions are listed within the assessment.

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Under a binding price ceiling, what does the change in consumer surplus represent?
A) The gain in surplus for those buyers who can still purchase the product at the lower price.
B) The loss in surplus for those buyers who previously purchased some units of the good at the higher price, but these units are no longer produced at the lower price.
C) The loss in surplus for those buyers who would like the purchase the excess demand created by the price ceiling policy.
D) Both A and B are correct.
E) Both A and C are correct.

When the market price is held above the competitive level, the deadweight loss is composed of:

A) producer surplus losses associated with units that used to be traded on the market but are no longer exchanged.

B) consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged.
C) producer and consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged.
D) There is no deadweight loss if the government uses a price floor policy to increase the price.

Compared to a tariff, an import quota, which restricts imports to the same amount as the tariff, will leave the country as a whole
A) worse off than a comparable tariff.
B) not as bad off as a comparable tariff.

C) about the same as a comparable tariff.

D) Any of the above can be true.

What is the welfare impact of a subsidy policy?
A) Producer surplus increases, consumer surplus declines, and total welfare declines.
B) Producer and consumer surplus increase, and these gains are larger than the government cost.

C) Producer and consumer surplus increase, and these gains are smaller than the government cost.

D) Producer surplus increases, consumer surplus declines, and total welfare increases due to the subsidy program.

Why is there a deadweight loss associated with subsidy payments?
A) There is no deadweight loss from a subsidy.
B) Quantity supplied is less than the equilibrium amount, so consumers and producers lose surplus value on those units that are no longer produced.
C) Quantity supplied exceeds the equilibrium amount, and consumer willingness to pay for these additional units is smaller than the marginal cost of producing them.
D) The subsidy payment does not distort quantities in the market, but the government cost exceeds consumer willingness to pay for the quantity demanded.

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17. Which of the following is a determinant of supply?

A. Tastes and preferences

B. Price of a complementary good

C. Consumer income

D. Technology

18. A market is in equilibrium:

A. provided there is no surplus of the product

B. at all prices above that shown by the intersection of the supply and demand curves

C. if the amount producers want to sell is equal to the amount consumers want to buy

D. whenever the demand curve is downsloping and the supply curve is upsloping.

19. If the market price is above the equilibrium price:

A. A shortage will occur and producers will produce more and lower prices

B. A surplus will occur and producers will produce less and lower prices

C. A surplus will result and consumers will bid prices up

D. Producers will make extremely high profits

20. The market system automatically corrects a surplus condition in a competitive market by:

A. Raising the price of the commodity in question while increasing the quantity demanded

B. Raising the price of the commodity in question while decreasing the quantity demanded

C. Reducing the price of the commodity in question while increasing the quantity demanded

D. Reducing the price of the commodity in question while decreasing the quantity demanded

21. The price elasticity of demand measures:

A. buyer responsiveness to price changes.

B. the extent to which demand curve shifts as incomes change.

C. the slope of the demand curve.

D. how far business executives can stretch their fixed costs

22. The elasticity of demand for a product is likely to be greater:

A. if the product is a necessity, rather than a luxury good.

B. the greater the amount of time over which buyers adjust to a price change

C. the smaller the proportion of one's income spent on the product.

D. the smaller the number of substitute products available.

23. Market failure is said to occur whenever:

A. private markets do not allocate resources in the most economically desirable way

B. prices rise

C. some consumers who want a good do not obtain it because the price is higher than they are willing to pay

D. government intervenes in the functioning of private markets.

24. A negative externality or spillover cost occurs when:

A. firms fail to achieve allocative efficiency.

B. firms fail to achieve productive efficiency.

C. the price of the good exceeds the marginal cost of producing it.

D. the total cost of producing a good exceeds the costs borne by the producer

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ECON 208 Chapter Notes - Chapter 5: Economic Equilibrium, Efficient-Market Hypothesis, Free Market

ECON 208 Full Course Notes

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