Economics Chapter 6
What are prices?
A tool for distributing goods and services.
Why does excess demand occur?
Because price is too low. It encourages buyers and discourages sellers.
What does excess supply force firms to do?
Decrease the price
What is the black market?
Doing business without regard to government controls on price or quantity.
How does a free market allow prices to be allocated efficiently?
Ensures that resources go to users who value them the most, as reflected by their willingness to pay a higher price.
What is excess demand and what happens to price?
Excess demand is when quantity demanded is more than quantity supplied. Price will go up.
What is excess supply and what causes it? What do consumers and firms do?
Excess supply is when quantity supplied is more than quantity demanded. Consumers buy less, firms lower prices and make fewer items.
What does a change in supply force the market to do?
Find a new equilibrium
What do prices allow?
Gives buyers and sellers a language. (Incentives, signals, flexibility, "free")
What are price floors? Why are they imposed?
Government wants to ensure that sellers receive a minimum price for their goods.
What do suppliers recognize with higher prices?
Higher profits
Some potential market problems?
Imperfect information, imperfect competition, spillover costs (externalities)
Where to an excess of supply or demand occur?
In the market
What does excess demand force firms to do?
Increase the price
What do price ceilings do to demand and supply?
Increases demand, decreases supply
What happens if a price floor is set above equilibrium? What if it is set below?
Labor demand goes down if above. If below, no impact; still have to pay fair wage to get labor.
What are the problems with excess demand?
Leads to shortages, higher search costs, items might be rationed, long lines, etc.
What is an example of a price floor?
Minimum wage
What factors shift the demand curve?
More people, changing tastes, advertising, changes in income.
How do firms respond to excess demand?
Raise price
What does excess demand do to equilibrium price and equilibrium quantity? What is the final result?
Raises price and quantity supplied. Leads to more goods/services at higher prices.
What is an example of a price ceiling? What are the problems?
Rent control. Shortage of units, little incentive for landlord to make repairs.
What happens when demand falls? How do suppliers respond? What happens to price and quantity?
Suppliers lower prices. Less Qs at lower prices.
What occurs as long as excess demand exists?
Suppliers will keep raising prices.
What are the things a market is good at?
That consumers can buy what they want, that sellers can make enough profit, and that sellers respond to the changing needs and tastes of consumers
What are price ceilings?
They cap prices
What are prices' role in a free market?
They move to LLC into hands of buyers.
Why does the government intervene in pricing?
To ensure that important goods are provided to those who need it or to ensure minimum payment.
What is disequilibrium? What are its two outcomes?
When p or q is at anywhere but E. Leads to shortages and surpluses.
What would happen without prices?
barter
How does the government intervene?
price ceilings and floors
What happens when supply falls?
shortage
What do economists say about the market and equilibrium?
the economy will tend toward equilibrium.
What is equilibrium?
when supply meets demand