Economy Chapter 6 Review
Describe three causes of a price change in a market.
A change in supply, a change in demand, or a change in both
Explain why shortages and surpluses are not temporary when price controls are used.
At lower prices there is no incentive for producers to produce more, so shortages continue. At higher prices there is no incentive to buy, so surpluses remain.
Effect: Equilibrium Price
Cause: A reasonably competitive market is experiencing alternating, yet consecutively smaller, surpluses and shortages.
Effect: Surplus
Cause: People decide that farmers should receive a higher price for milk and cheese, so a price floor for these products is established
Effect: Shortage
Cause: The government tries to keep prices down by legislating price ceilings.
Effect: Rationing
Cause: The government wants to allocate scarce goods and services without the help of a price system.
Describe four advantages of using price as an allocating mechanism.
Prices are neutral, favoring neither producer nor consumer, and flexible, allowing the market economy to accommodate change. Prices have no administrative costs and are efficient because they are understood by all.
Explain what is meant by the statement that markets "talk."
The significant movement of prices up or down reflects the judgments of all buyers and sellers in the market. Enough buyers or sellers cause significant price movements that communicate to all buyers and sellers.
List three problems of allocating goods and services using nonprice-related methods.
establishing fair system of allocation; cost of administering system; negative impact system has on incentive to work and produce
Identify two programs that have historically been used to stabilize farm incomes.
loan supports, deficiency payments
Explain the role of shortages and surpluses in competitive markets.
shortage: the quantity demanded is greater than the quantity supplied at a given price, and prices will go up; surplus: the quantity supplied is greater than the quantity demanded, and prices will go down
