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

2. 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”.

3. 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.

4. 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

5. 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

6. 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

7. 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

8. 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

9. “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.

10. Review Questions

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

12. 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

13. 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

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

15. 5. A price ceiling causes a ________.
shortage