Social Goals vs. Market Efficiency Chapter 6: Section 3 Kishan Patel, Harriotte Davis, Katherine Bishara, Sava Patel

Main Idea To achieve one or more of its social goals, government sometimes sets prices. Key Concepts Describe the consequence of having a fixed price in a market. Explain how loan supports and deficiency payments work. Understand what it means when “markets talk”.

Goals of a Market Economy Two goals of a market economy are equity and security. To protect these, the government sets price floors and price ceilings.

Vocabulary Price Ceiling – maximum legal price that can be charged for a product Ex.) Landlord wants $900 2 million apartments available Government changes $600 Demand for 2.4 million Landlord wants more money Changes apartment into condos & office buildings Supply of 1.6 million apartments Shortage of 800,000

Vocab. Cont’d. 12 million workers Minimum wage $5.15 Price Floor – lowest legal price that can be paid for a good or service Minimum Wage – the lowest legal wage that can be paid to most workers Ex.) Equilibrium price $4 12 million workers Minimum wage $5.15 14 million workers 10 million hired 4 million surplus

Vocab. Cont’d. Nonrecourse loan – loan taken by farmers that carries neither a penalty or further obligation to repay if not paid back Commodity Credit Corporation (CCC) – an agency in the Department of Agriculture, to help stabilize agricultural prices Target Price – a price floor for farm products

Example of Nonrecourse Loan Ex.) $4 per bushel target price for wheat 10,000 bushel produced 8,000 sold 2,000 picked up by CCC Total of $40,000 Agricultural Price Support Programs

Vocabulary Cont’d Deficiency Payments – Check sent to producers that makes up the difference between the actual market price and the target price Ex.) $4 target price $2.50 open market Sold 10,000 Difference $1.50 Difference x 10,000= paid $15,000 by gov’t Agricultural Price Support Programs

“Markets Talk” “Markets are said to talk when prices in them move up or down significantly.” For example, if the government were to raise taxes, investors might sell some of their stocks for gold and cash. Stock prices fall, gold prices rise. The market responds to what investors feel is a good idea or a bad idea. If all were not against this new policy, only some, some investors would sell while others would buy.

Review Questions

1. Where does the equilibrium price lie on a graph? A: The equilibrium price lies where the supply and demand curves intersect.

Answer: C – Nonrecourse loan 2. Which of these carry neither a penalty nor obligation to repay if not paid back? A. Deficiency payments B. Target price C. Nonrecourse loan D. Loan supports Answer: C – Nonrecourse loan

True or False 3. Under the loan support program, a farmer borrows money from the CCC at the target price and pledges his/her crops as security in return. A: True

4. ____________ are impersonal mechanisms that bring buyers and sellers together. Markets

5. A price ceiling causes a ________. shortage