22 terms

Economics Today (the Macro View): Chapter 4

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Price System
An economic system in which relative prices are constantly changing to reflect changes in supply and demand for different commodities.
-The prices in those commodities are signal to everyone within the system as to what is relatively scarce and what is relatively abundant.
Voluntary Exchange
An act of trading, done on an elective basis, in which both parties to the trade are better off after the exchange.
-In our economy, the majority of exchanges take place voluntarily in markets.
Terms of Exchange
The conditions under which trading takes place. Usually the terms of exchange are equal to the price at which a good is traded.
the exchange arrangements of both buyers and sellers that would underline the forces of supply and demand.
A market encompasses...
Transaction Costs
All of the costs associated with exchange, including the informational costs of finding out the price and quality, service record, and durability of a product, plus the cost of contracting and in forcing that contract.
-Individuals turn to markets because they reduce the cost of exchanges.
Middlemen
Incentives for intermediaries to lower the cost.
-Specialize in lowering transaction cost.
-Whenever producers do not sell their products directly to the final consumer, one or more middlemen are involved.
Wholesalers
Distributors that sell products to retailers such as super markets.
Price Flexibility
May take the form of indirect adjustments such as hidden payments or quality changes.
-Ex: Published price of flowers may stay the same, but the freshness of flowers may change, meaning that the price of per-constant-quality unit changes.
Rationing Function of Prices
The synchronization of decisions by buyers and sellers that leads to equilibrium.
-Whenever the rationing function of price is frustrated by government-enforced price ceilings that set prices below the market clearing level, a prolonged shortage results.
-First come, first served
-Political Power
-Physical Power
3 Methods of nonprice rationing
Price Controls
Government-mandated minimum or maximum prices that may be changed for goods and services.
Price Ceiling
A legal maximum price that may be changed for a particular good or service.
-New York Real estate market
Price Floor
A legal minimum price below which a good or service may not be sold.
-Ex: Legal minimum wage
Nonprice Rationing Devices
All methods used to ration scarce goods that are price-controlled.
-Whenever the price system is not allowed to work, nonprice rationing devices will evolve to ration the affected goods and services.
Black Market
A market in which goods are traded at prices above their legal maximum prices or in which illegal goods are sold.
Rent Control
Price ceilings on rent.
-A system under which the local government tells building owners how much they can charge their tenants for rent.
1)To promote the efficient maintenance of existing housing and stimulate the construction of new housing.
2)To allocate existing scarce housing among competing claimants.
3)To ration the use of existing houses by current demanders.
3 Functions of rental prices
construction of new rental units.
-Rents are the most important long-term determinant of profitability, and rent controls have artificially depressed them.
Rent control discourages...
-Property owners
-Low-income individuals
Who loses when it comes to rent control?
-Upper-income professionals
Who gains when it comes to rent control?
Support Price
Governmentally established price floor.
-Associated with agriculture.
Minimum Wage
A wage floor, legislated by government, setting the lowest hourly rate that firms may legally pay workers.
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