ECON 1110 Chapter Notes - Chapter 4: Avoidance Speech, Price Ceiling, Shortage

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Chapter 4 Notes

•price rationing: the process by which the market system allocates goods and

services to consumers when quantity demanded exceeds quantity supplied

•The market has determined who gets the wheat: the lower total supply is rationed

to those who are willing and able to pay the higher price.

•The idea of “willingness to pay” is central to the distribution of available supply,

and willingness depends on both desire (preferences) and income/wealth.

Willingness to pay does not necessarily mean that only the very rich will

continue to buy wheat when the price increases.

•If the product is in strictly scarce supply, as a single painting is, its price is said

to be demand-determined. Its price is determined solely and exclusively by the

amount that the highest bidder or highest bidders are willing to pay.

Constraints on the Market and Alternative Rationing Mechanisms:

•Preventing price from rising to equilibrium is justified on several grounds,

among them are

1. the price-gouging is bad

2. income is unfairly distributed

3. some items are necessities and everyone should be able to buy them at a

“reasonable” price

•attempts to bypass rationing in the market and to use alternative rationing

devices are more difficult and more costly than they would seem at first glance.

•very often such attempts distribute costs and benefits among households in

unintended ways.

Price Ceiling

•The Organization of the Petroleum Exporting Countries (OPEC) is an

organization of twelve countries (Algeria, Angola, Ecuador, Iran, Iraq, Kuwait,

Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela)

control about one-third of the known supply of oil in the year 2010.

•OPEC imposed an embargo on oil to the US and therefore caused a shortage of

gasoline available at local gas pumps. Had the market system been allowed to

operate, refined gasoline prices would have increased dramatically until quantity

supplied was equal to quantity demanded. However, the government decided that

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rationing gasoline to those who were willing and able to pay the most was unfair,

and Congress imposed a price ceiling of $0.57 per gallon of leaded regular gas,

which is intended to keep gasoline “affordable”.

•price ceiling: a maximum price that sellers may charge for a good, usually set by

government

Nonprice rationing:

•queuing: waiting in line as a means of distributing goods and services: a

nonprice rationing mechanism

•favored customers: those who receive special treatment from dealers during

situations of excess demand

•ration coupons: tickets or coupons that entitle individuals to purchase a certain

amount of a given product per month

•black market: a market in which illegal trading takes place at market-

determined prices

Price Floor:

•price floor: a minimum price below which exchange is not permitted

•minimum wage: a price floor set for the price of labor

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Document Summary

Its price is determined solely and exclusively by the amount that the highest bidder or highest bidders are willing to pay. Constraints on the market and alternative rationing mechanisms: preventing price from rising to equilibrium is justified on several grounds, among them are. 3. the price-gouging is bad income is unfairly distributed some items are necessities and everyone should be able to buy them at a. Price ceiling: the organization of the petroleum exporting countries (opec) is an organization of twelve countries (algeria, angola, ecuador, iran, iraq, kuwait, Had the market system been allowed to operate, refined gasoline prices would have increased dramatically until quantity supplied was equal to quantity demanded. Price floor: price floor: a minimum price below which exchange is not permitted, minimum wage: a price floor set for the price of labor. Supply and demand analysis: an oil import fee.

Related Questions

True or False:

1. Consumer surplus is the buyer's willingness-to-pay minus the seller's opportunity cost of production.

2. If your willingness-to-pay for a hamburger is $3 and you paid $2, then your consumer surplus is $5.00

3. The opportunity cost of production for a seller includes the implicit cost of the seller's time.

4. The height of the supply curve at a selected quantity is the seller's opportunity cost of producing that marginal unit.

5. Total surplus (total well-being) is the seller's cost of production minus the buyer's willingness-to-pay.

6. The competitive market equilibrium outcome is efficient because it allocates the produced output to the buyers who place the highest value on the good

7. Producer surplus is the area above the supply curve and below the price.

8. The competitive market equilibrium outcome maximizes total surplus (total well-being)

9. Producing and consuming more of a good will always increase the total surplus(total well-being).

redelephant805

1. Other things remaining the same, a left shift in the supply curve will lead to:

A. a decrease in the equilibrium price and the equilibrium quantity.

B. an increase in the equilibrium price and the equilibrium quantity.

C. an increase in the equilibrium price and a decrease in the equilibrium quantity.

D. a decrease in the equilibrium price and an increase in the equilibrium quantity.

2. Two goods are said to be complements when a fall in the price of one good:

A. leads to a fall in the price of the other good.

B. leads to a left shift in the demand for the other good.

C. leads to a right shift in the demand for the other good.

D. doesn't affect the demand for the other good.

3. In a competitive free market:

A. all exchanges take place involuntarily.

B. there is no provision for the protection of property rights.

C. there is only one seller and many buyers.

D. the government does not impose price controls.

4. Which of the following correctly explains the role of economic agents in a free market?

A. Economic agents allocate goods to those buyers who value the goods the most.

B. Economic agents allocate goods to those buyers who need the goods the most.

C. Economic agents set production quotas for sellers in the market.

D. Economic agents set prices according to the production cost of each good.

5. Which of the following was an effect of the price ceiling placed on gasoline in the U.S. in the 1970s?

A. Gas stations ran out of gas as the quantity of gas demanded exceeded the quantity supplied.

B. Car owners started buying luxury cars that were less fuel-efficient as the price of gas was very low.

C. Those who valued gas the most were able to buy gas under the price ceiling.

D. The inventory of unsold gas increased and gas stations incurred losses.

6. Willingness to accept is:

A. the highest price that a producer is willing to receive to sell an extra unit of a good.

B. always higher than the marginal cost of production.

C. always lower than the marginal cost of production.

D. the lowest price that a producer is willing to receive to sell an extra unit of a good.

7. Assume that the economy is in a recession and consumers are expecting a fall in their income levels. This will cause a(n):

A. right shift in the market demand for all goods.

B. left shift in the market demand for all goods.

C. increase in the total quantity demanded of all goods.

D. decrease in the total quantity demanded of all goods.

8. Which of the following factors is expected to cause the demand curve for coffee to shift to the right?

A. A higher personal tax on the income of all consumers

B. An increase in the supply of coffee due to better weather

C. A higher tax on the sale of tea, a substitute for coffee

D. A fall in the manufacturing cost of coffee

9. If the demand and supply curves for a commodity shift to the right and the shift in demand is greater than the shift in supply, then in comparison to the initial equilibrium, the new equilibrium will be characterized by:

A. the same price and quantity.

B. a lower price and quantity.

C. a higher price and a lower quantity.

D. a higher price and quantity.

10. Which of the following statements correctly describes a perfectly competitive market?

A. Haggling and bargaining are commonly observed in a perfectly competitive market.

B. Buyers in a perfectly competitive market pay different prices according to their individual demand.

C. In a perfectly competitive market, individual sellers and buyers can influence the market price.

D.All participants in a perfectly competitive market are price-takers.

viridianhare505

1 Other things remaining the same, a left shift in the supply curve will lead to:

A. a decrease in the equilibrium price and the equilibrium quantity.

B. an increase in the equilibrium price and the equilibrium quantity.

C. an increase in the equilibrium price and a decrease in the equilibrium quantity.

D. a decrease in the equilibrium price and an increase in the equilibrium quantity.

2 Two goods are said to be complements when a fall in the price of one good:

A. leads to a fall in price of the other good.

B. leads to a left shift in the demand for the other good.

C. leads to a right shift in the demand for the other good.

D. doesn't affect the demand for the other good.

3 In a competitive free market:

A. all exchanges take place involuntarily.

B. there is no provision for the protection of property rights.

C. there is only one seller and many buyers.

D. the government does not impose price controls.

4 Which of the following correctly explains the role of economic agents in a free market?

A. Economic agents allocate goods to those buyers who value the goods the most.

B. Economic agents allocate goods to those buyers who need the goods the most.

C. Economic agents set production quotas for sellers in the market.

D. Economic agents set prices according to the production cost of each good.

5 Which of the following was an effect of the price ceiling placed on gasoline in the U.S. in the 1970s?

A. Gas stations ran out of gas as the quantity of gas demanded exceeded the quantity supplied.

B. Car owners started buying luxury cars that were less fuel-efficient as the price of gas was very low.

C. Those who valued gas the most were able to buy gas under the price ceiling.

D. The inventory of unsold gas increased and gas stations incurred losses.

6 Willingness to accept is:

A. the highest price that a producer is willing to receive to sell an extra unit of a good.

B. always higher than the marginal cost of production.

C. always lower than the marginal cost of production.

D. the lowest price that a producer is willing to receive to sell an extra unit of a good.

7 Assume that the economy is in a recession and consumers are expecting a fall in their income levels. This will cause a(n):

A. right shift in the market demand for all goods.

B. left shift in the market demand for all goods.

C. an increase in the total quantity demanded of all goods.

D. decrease in the total quantity demanded of all goods.

8 Which of the following factors is expected to cause the demand curve for coffee to shift to the right?

A. A higher personal tax on the income of all consumers

B. An increase in the supply of coffee due to better weather

C. A higher tax on the sale of tea, a substitute for coffee

D. A fall in the manufacturing cost of coffee

9 If the demand and supply curves for a commodity shift to the right and the shift in demand is greater than the shift in supply, then in comparison to the initial equilibrium, the new equilibrium will be characterized by:

A. the same price and quantity.

B. a lower price and quantity.

C. a higher price and a lower quantity.

D. a higher price and quantity.

10 Which of the following statements correctly describes a perfectly competitive market?

A. Haggling and bargaining are commonly observed in a perfectly competitive market.

B. Buyers in a perfectly competitive market pay different prices according to their individual demand.

C. In a perfectly competitive market, individual sellers and buyers can influence the market price.

D. All participants in a perfectly competitive market are price-takers.

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ECON 1110 Chapter Notes - Chapter 4: Avoidance Speech, Price Ceiling, Shortage

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