Elastic Demand & Price Controls

What is the primary purpose of implementing price controls in an economy? Pick Two!

• To correct market failures

• To increase government revenue

• To protect consumers and sellers for economic and social reasons

• To ensure all markets operate at equilibrium

How does a price floor, such as a minimum wage, typically affect the labor market?

• It leads to a surplus of workers because the quantity supplied exceeds the quantity demanded.

• It balances the number of jobs with the number of workers seeking employment.

Which of the following is a likely consequence of imposing a price ceiling, such as rent control, in the housing market?

• B) A shortage in the market where the quantity demanded exceeds the quantity supplied

• D) A balanced market where supply meets demand

What is meant by 'deadweight loss' in the context of price controls, and what causes it?

• A) The loss of government revenue due to decreased taxation

• B) The loss to the economy because resources are being used inefficiently due to prices being set away from the equilibrium

Why might price controls, despite their intentions, lead to market inefficiencies?

• C) They prevent prices from reaching equilibrium levels, leading to mismatches in supply and demand.

• D) They promote competition and innovation among producers.

Which of the following best describes the concept of elasticity in economics?

• The ability of a product to be stored for a long time without losing value.

• The sensitivity of quantity demanded to changes in price.

• The rate at which a product depreciates over time.

Consider two products: luxury cars and basic groceries. Which statement best explains the difference in their demand elasticity?

• Luxury cars have more elastic demand because they are necessities.

• Basic groceries have more elastic demand because they have many substitutes.

• Luxury cars have more elastic demand because they are non-essential and consumers can delay purchases.

How would a government use the concept of elasticity to determine the impact of a new tax on a product?

• By assessing whether the product is a luxury or a necessity.

• By analyzing how the quantity demanded will change with the new tax, considering the product's elasticity.

If a product has perfectly inelastic demand, which of the following is true?

• The demand curve is horizontal, indicating that any change in price leads to a large change in quantity demanded.

• The demand curve is vertical, indicating that quantity demanded remains constant regardless of price changes.

Why is understanding elasticity important for businesses when setting prices for their products?

• It helps businesses determine the optimal level of production to maximize profits.

• It enables businesses to anticipate how changes in price will affect total revenue and adjust pricing strategies accordingly.