Econ Chapter 6

4 roles price plays in a modern mixed economy

Prices Convey Information to Consumers and Producers, Prices Create Incentives to Work and Produce, Prices Allow Markets to Respond to Changing Conditions, Prices Allocate Scarce Resources Efficiently

rent control

a legal limit on the amount a landlord can charge a tenant; a price ceiling on rents

price ceiling

a maximum price set by the government to prevent prices from going too high (Price Ceilings Lead to Excess Demand)

price floor

a minimum price set by the government to prevent prices from going too low(Price Floors Lead to Excess Supply)

excess demand

a situation that exists when the quantity demanded of a product exceeds the quantity supplied, thus producing a shortage

disequilibrium

a situation that exists when the quantity of a product demanded by consumers does not equal the quantity supplied, resulting in a shortage or a surplus

excess supply

a situation that exists when the quantity supplied of a product exceeds the quantity demanded, thus producing a surplus

black market

an illegal market in which goods are traded at prices or in quantities higher than those set by law

price controls

government-imposed limits on the prices that producers may charge in the market

Prices Convey Information to Consumers and Producers (1/4)

prices are like a language. It helps consumers and producers to understand the wants and needs of either side and helps to give both information about the product ($1 product quality compared to a $50 product quality)

Prices Create Incentives to Work and Produce(2/4)

prices can inspire people to work harder and to make more money. it can also help to invigorate people to produce more and to get a higher-paying job (increase in demand for houses= more architects)

Prices Allocate Scarce Resources Efficiently(4/4)

prices help producers especially to determine what to allocate limited resources to in order to maximize benefits. (car manufacturer)

market equilibrium

the point at which the quantity of a product demanded by consumers in a market equals the quantity supplied by producers

market price

the price a willing consumer pays to a willing producer for a good or service

market-clearing price

the price at which the quantity demanded of a product equals the quantity supplied; another term for equilibrium price

equilibrium price

the price at which the quantity of a product demanded by consumers equals the quantity supplied by producers

equilibrium quantity

the quantity of a good or service demanded by consumers and supplied by producers when the market is in equilibrium

Three Questions to Ask About Demand and Supply Shifts

Does the event affect demand, supply, or both? Does the event shift the demand or supply curve to the right or to the left? What are the new equilibrium price and quantity, and how have they changed as a result of the event?

Prices Allow Markets to Respond to Changing Conditions(3/4)

by increasing prices during shortages and lowering them again during surplus, prices help to give the condition of a state or country/region.(gas shortage after Hurricane Katrina)

rationing

the controlled distribution of a limited supply of a good or service

minimum wage

the lowest hourly rate, or wage, that employers can legally pay their employees; a price floor on wages