Econ Ch 6 Review
-voluntary consumer limitation of sugar consumption -rationing -price hikes by producers
suppose that a recent snowstorm has caused a supply shock in the market for sugar in the United States. how would you attempt to solve the problems that follow the storm? what actions are available to both consumers and producers?
price floor
a government-mandated minimum price that must be paid for a good or service
price ceiling
a maximum price that can be legally charged for a good or service
supply shock
a sudden drop in the supply of a good
rationing
a system of allocating scarce goods and services by criteria other than price
shortage
any situation in which quantity demanded exceeds quantity supplied
Price ceiling- placed on goods that are considered essential but may become too expensive to afford (ex. Rent control-reduces quantity and quality of housing) Price floor-imposed when government wants sellers to earn a minimum reward for their efforts (ex. Minimum wage)
for price floors and ceilings, what are they on what products and what are the effects?
price gives suppliers a way to allow consumers to choose among similar products
how do prices in the free market lead to efficient resource allocation? describe an example.
search costs
the financial and opportunity costs consumers pay in searching for a good or service
equilibrium
the point at which quantity demanded and quantity supplied are equal
excess supply which remains unsold so eventually price drops
what happens when the supply of a nonperishable good is greater than what the consumer wants to buy?
Quickest way to resolve excess demand; conserve goods (ex. During war)
what is the purpose of rationing?
if the minimum wage is set above the market equilibrium wage rate, the result is a decrease in employment; if the minimum wage is below the equilibrium rate, it will have no effect because employers would have to pay at least the equilibrium rate to find workers in a free market
what problem can a price floor cause?
the government can impose a price ceiling (maximum price) or price floor (minimum price) that can be legally charged for a good or service
what role does the government play in determining some prices?
disequilibrium
when quantity supplied is not equal to quantity demanded in a market; describes any price or quantity not at equilibrium
To provide and equal distribution of wealth
why attempt a command economy?
-rent control laws are enacted to control inflation of prices and assist lower-income groups -the laws cause disequilibrium, resulting in a shortage -when rent control is repealed, the prices increase to equilibrium, and lower-income residents are forced to leave
why have some cities and towns passed rent control laws? how do these laws affect price equilibrium? what happens when these laws are replaced?