Key Terms
Price control
Government regulation of prices rather than allowing market forces to determine them.
Definition
The loss in social surplus that occurs when a market operates at an inefficient quantity. It is value that benefits no o
Purpose
Keep prices high enough to protect producers (especially in agriculture) or workers (minimum wage).
Productive efficiency
Producing maximum output with available resources; no waste. On the production possibilities frontier (PPF).
Allocative efficiency
When benefits of trade are maximized and the mix of goods produced matches what society most desires.
Example from source
Bill values one more apple at $1.00. Angie values one more apple at $0.10.
Law of diminishing marginal utility
As you consume more of something, each additional unit is worth less to you.
Example
A producer was willing to supply a tablet at $45. Market price is $80.
Net result
Producer surplus increases partially; consumer surplus decreases more; social surplus decreases overall.
Binding price ceiling
A price ceiling set BELOW equilibrium; causes a shortage.
Binding price floor
A price floor set ABOVE equilibrium; causes a surplus.
Consumer surplus
The difference between willingness to pay and actual price paid; area under demand curve above equilibrium price.
Deadweight loss
Loss in social surplus from operating at an inefficient quantity; value destroyed, not transferred.
Marginal analysis
Comparing benefits and costs of a little more or a little less of a good.
Price ceiling
A legal maximum price; keeps prices from rising above a set level.