Chapter 4 Flashcards
Define the “price system.”
An economic system in which relative prices are constantly changing to reflect changes in supply and demand for different commodities.
True or False
The market system is the same as the price system.
True
What is “voluntary exchange” in an economic sense?
A mutually agreed-upon trade in which both parties expect to benefit.
True or False
The price of commodities are signals to everyone within the price system as to what is scarce and what is abundant.
True
True or False
Individuals turn to markets because markets increase the cost of exchanges.
False. Markets decrease the cost of exchanges.
What is a “transaction cost?”
All the costs involved with making exchanges.
Note: includes miney, manpower, time, etc
True or False
In general, the more organized the market, the lower the transaction costs.
True
What are platform firms?
Companies whose services link individuals who wish to make exchanges.
An example would be a distributor who buys food from farmers and sells it to supermarket chains.
What is a key function of the “middle man.”
To reduce the transaction costs of buyers and sellers in the market of goods and services.
Market equilibrium can change whenever there is a ______.
Shock caused by a change in a ceteris paribus condition for demand or supply.
A shock to the supply and demand system can be represented by __________.
A shift in either the supply curve, demand curve, or both.
When demand and supply increase, the equilibrium quantity ________.
Unambiguously rises.
Decreases in both supply and demand tend to generate a _____ in quantity.
decrease
When demand decreases and supply increases at the same time, the equilibrium price will ____.
Fall
If demand increases and supply decreases at the same time, the equilibrium price will tend to _____.
Rise
The synchronization of decisions by buyers and sellers that leads to equilibrium is called the _________.
Rationing function of prices.
Whenever the rationing function of prices (RFP) is frustrated by government-enforced price ceilings that set prices below the market-clearing level, a ____ results.
Prolonged shortage
True or False
The price system can be considered a form of rationing.
True
True or False
Rationing via the price system is the most inefficient way of using resources.
False, the price system is the most efficient compared to rationing by queue or coupons.
What are price controls?
Government-mandated minimum or maximum prices that may be charged for goods or services.
If a price ceiling is below a market-clearing price, imposing a price ceiling will always create _____.
A shortage
What is the definition of non-price rationing devices?
Methods used to ration scarce goods that are price-controlled.
What is the general definition of a “black market.”
A market in which goods are traded at prices above their legal maximum prices or in which illegal goods are sold.
What are the three functions of rent prices?
- Promote efficient maintenance and promote new housing projects
- Allocate existing scarce housing among competing claimants.
- Ration the use of existing housing by current demanders.
