Chapter 4 - Prices: Free, Controlled, and Relative

Question 1

Price Ceiling

Answer 1

government-
mandated maximum price above
which legal trades cannot be made
* Results (if set below equilibrium
price):
− Shortages
− Few exchanges
− Nonprice rationing devices

Question 2

Price Floor

Answer 2

A government-mandated
minimum price below which legal
trades cannot be made
* Results (if set above equilibrium
price):
− Surpluses
− Few exchanges
− Nonprice rationing devices

Question 3

Absolute (money price)

Answer 3

The price of a good in money terms

Question 4

Relative Price

Answer 4

The price of a good in terms of another good

Question 5

Absolute and Relative price (example)

Answer 5

Suppose the absolute price of a car is $30,000 and the absolute price of a
computer is $2,000
− Then the relative price of the car (in terms of computers) is 15 computers; a
person gives up the opportunity to buy 15 computers when buying a car