Chapter 6 and 7

Study Guide

Rationing

• System of allocating goods and services without prices.

Economic Model

• A set of assumptions that can be listed in a table, illustrated with a graph, or even stated algebraically.

Deficiency Payment

• Cash payment making up the difference between the market price and the target price of an agricultural crop.

Surplus

• Situation where quantity supplied is greater than quantity demanded at a given price.

Shortage

• Situation where quantity supplied is less than quantity demanded at a given price.

Equilibrium Price

• Price that clears the market.

Rebate

• Partial refund of the original price of a product.

Price Ceiling

• Maximum legal price that can be charged for a product.

Price Floor

• Lowest legal price that can be charged for a product.

Target Prices

• Agricultural floor price set by the government to stabilize farm incomes.

List five advantages of Prices

• Prices are neutral.• Prices are flexible.• Freedom of Choice.• No Administrative Cost.• Prices are efficient.

List three problems with rationing.

• Question of Fairness• High Administrative Cost• Diminished Incentives

Describe two effects of having a fixed price other than the equilibrium price forced on

a market.

• Shortages are created if price ceilings are set below the equilibrium price.

• Surpluses are created if price floors are set high than the equilibrium price.

Describe how surpluses and shortages help the market find the equilibrium

price.

• Surpluses indicate that prices should be lowered.

• Shortages indicate that prices should be increased.

• Through this process, equilibrium eventually will be reached.

Explain the importance of an economic model.

• It shows how markets work by helping analyze behavior and predicts outcomes.

Pure Competition

• This market situation includes independent and well-informed buyers and sellers of exactly the same economic product.

Monopolistic Competition

• This market situation has all the conditions of pure competition except for identical products.

Oligopoly

• Market situation in which a few very large sellers of a product dominate.

Natural Monopoly

• Market situation where costs are minimized by having a single firm produce the product.

Technological Monopoly

• Market situation where a firm has a monopoly because it owns or controls a manufacturing method, process, or other scientific advance.

Geographic Monopoly

• Market situation where a firm has a monopoly because of its location or the small size of the market.

Pure Monopoly

• Market situation with only one seller of a particular economic product that has no close substitutes.

Price War

• Series of price cuts by all producers that may lead to unusually low prices in the industry.

Price-fixing

• Agreeing to charge the same or similar prices for a product.

Collusion

• A formal agreement to set prices or to otherwise behave in a cooperative manner.