Chapter 6 and 7 Study Guide

Rationing System of allocating goods and services without prices.

Economic Model A set of assumptions that can be listed in a table, illustrated with a graph, or even stated algebraically.

Deficiency Payment Cash payment making up the difference between the market price and the target price of an agricultural crop.

Surplus Situation where quantity supplied is greater than quantity demanded at a given price.

Shortage Situation where quantity supplied is less than quantity demanded at a given price.

Equilibrium Price Price that clears the market.

Rebate Partial refund of the original price of a product.

Price Ceiling Maximum legal price that can be charged for a product.

Price Floor Lowest legal price that can be charged for a product.

Target Prices Agricultural floor price set by the government to stabilize farm incomes.

List five advantages of Prices Prices are neutral. Prices are flexible. Freedom of Choice. No Administrative Cost. Prices are efficient.

List three problems with rationing. Question of Fairness High Administrative Cost Diminished Incentives

Describe two effects of having a fixed price other than the equilibrium price forced on a market. Shortages are created if price ceilings are set below the equilibrium price. Surpluses are created if price floors are set high than the equilibrium price.

Describe how surpluses and shortages help the market find the equilibrium price. Surpluses indicate that prices should be lowered. Shortages indicate that prices should be increased. Through this process, equilibrium eventually will be reached.

Explain the importance of an economic model. It shows how markets work by helping analyze behavior and predicts outcomes.

Pure Competition This market situation includes independent and well-informed buyers and sellers of exactly the same economic product.

Monopolistic Competition This market situation has all the conditions of pure competition except for identical products.

Oligopoly Market situation in which a few very large sellers of a product dominate.

Natural Monopoly Market situation where costs are minimized by having a single firm produce the product.

Technological Monopoly Market situation where a firm has a monopoly because it owns or controls a manufacturing method, process, or other scientific advance.

Geographic Monopoly Market situation where a firm has a monopoly because of its location or the small size of the market.

Pure Monopoly Market situation with only one seller of a particular economic product that has no close substitutes.

Price War Series of price cuts by all producers that may lead to unusually low prices in the industry.

Price-fixing Agreeing to charge the same or similar prices for a product.

Collusion A formal agreement to set prices or to otherwise behave in a cooperative manner.