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44 Cards in this Set
- Front
- Back
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Price System or Market System
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An economic system in which relative prices are constantly changing to reflect changes in supply and demand
Prices signal what is relatively scarce and relatively abundant. |
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Markets:
Emphasize ________ Determine the _______ Facilitate ______ |
voluntary exchange
terms of exchange exchange |
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The Principle of Voluntary Exchange
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Acts of trading between individuals that make both parties to the trade subjectively better off
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Terms of Exchange
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The prices we pay for the desired items
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Transaction Costs
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The costs associated with exchange
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Examples of transaction costs
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Price shopping
Determining quality Determining reliability Service availability Cost of contracting |
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The role of middlemen
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Middlemen (intermediaries) or brokers reduce transaction costs by providing information to buyers and sellers
Examples Real estate brokers Stock brokers Consignment shops Car dealerships |
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Increases in demand _____ equilibrium price and quantity.
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increase
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Decreases in demand ________ equilibrium price and quantity.
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decrease
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Increases in supply _______ equilibrium price and ______ equilibrium quantity.
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decrease
increase |
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Decreases in supply ______ equilibrium price and ______ equilibrium quantity
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increase
decrease |
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When both demand and supply shift
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Simultaneous changes in demand and supply put conflicting pressure on price or quantity.
The resulting effect depends upon how much each curve shifts. |
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When both demand and supply increase
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Change in price is indeterminate
Quantity will increase |
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When both demand and supply decrease
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Change in price is indeterminate
Quantity will decrease |
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When supply decreases and demand increases
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Price will increase
Change in quantity is indeterminate |
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When supply increases and demand decreases
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Price will decrease
Change in quantity is indeterminate |
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Price Flexibility and Adjustment Speed
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Prices quite flexible in unfettered markets can be less flexible in other market scenarios.
May experience indirect adjustments such as hidden payments, quality changes May not reach equilibrium right away |
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Adjustment speed
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Market characteristics influence adjustment speed.
Markets may overshoot in the adjustment process. Markets are subject to energy shocks, labor strikes, severe weather |
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The Rationing Function of Prices
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Synchronization of decisions of buyers and sellers that leads to equilibrium is called the rationing function of prices.
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Methods of non-price rationing
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Rationing by queues (waiting in line)
Rationing by random assignment, and/or coupons |
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The essential role of rationing (with scarcity rationing must occur)
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We must choose the rationing mechanism: price or non-price.
Price rationing leads to most efficient use of available resources; all gains from mutually beneficial trade are captured. |
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If price rationing is the most efficient is it the “best” way to ration?
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Economists cannot say which system is “best.” They can say rationing via the price system leads to the most efficient use of available resources.
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Price Controls
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Government-mandated minimum or maximum prices
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Price Ceiling
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A legal maximum price
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Price Floor
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A legal minimum price
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Non-Price Rationing Devices
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All methods used to ration scarce goods that are price-controlled
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Black Market
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A market in which price-controlled goods are sold at an illegally high price
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The Policy of Controlling Rents
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The functions of rental prices
Promote the efficient maintenance and construction of housing Allocate existing housing Ration the use of housing |
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Rent controls and construction
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Controls discourage construction
With a 16% vacancy rate and no controls, Dallas recently built 11,000 new rental units. With a 1.6% vacancy rate and controls, San Francisco recently built 2,000 new rental units. |
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Effects on the existing supply of housing and current use of housing
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Property owners cannot recover costs
Maintenance, repairs, capital improvements Rations the current use of housing Reduces mobility, e.g., New York’s “housing gridlock” |
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Attempts to evade rent controls
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Forcing tenants to leave
Tenants subletting apartments Housing courts |
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Who gains and who loses from rent controls?
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Losers
Property owners Low-income individuals Gainers Upper-income professionals |
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Support Price
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The governmentally established price floor
Associated with agricultural products |
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Minimum Wage
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A wage floor, legislated by government, setting the lowest hourly wage rate that firms may legally pay their workers
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Quantity Restrictions
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Governments can impose quantity restrictions, most obvious—banning ownership or trading of a good
Human organs Drugs Hospital beds Gold from 1933 to 1973 |
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Government Prohibitions and Licensing Requirements
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Some commodities cannot be purchased at all legally; others require a license
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Import Quota
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Supply restriction that prohibits the importation of more than a specified quantity of a particular good
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Essential features of the price system
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A price system (market system) allows prices to respond to changes in supply and demand for different commodities.
The terms of exchange—prices—are communicated in markets that tend to minimize transactions costs. |
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How changes in demand and supply affect market price and equilibrium quantity
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Increases in demand increase equilibrium price and quantity; decreases in demand decrease equilibrium price and quantity.
Increases in supply decrease market price and increase equilibrium quantity; decreases in supply increase market price and decrease equilibrium quantity |
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How changes in demand and supply affect market price and equilibrium quantity
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When both demand and supply shift at the same time, the result is indeterminate.
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The rationing function of prices
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In a market system, prices ration scarce goods and services.
Other ways of rationing include first come, first served; political power; physical force; random assignment; and coupons. |
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The effects of price ceilings
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A price ceiling set below the market (equilibrium) price results in a shortage.
The resulting shortage can lead to non-price rationing devices and black markets. |
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The effects of price floors
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If the price floor is set above the market price, a surplus results.
A price floor can take the form of a government-imposed price support or minimum wage. |
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Government-imposed restrictions on market quantities
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Bans on sale or ownership
Licensing restrictions Import quotas |
