Chapter 6 and 7
Study Guide
Rationing
• System of allocating goods and
services without prices.
Economic Model
• A set of assumptions that can be
listed in a table, illustrated with a
graph, or even stated algebraically.
Deficiency Payment
• Cash payment making up the
difference between the market
price and the target price of an
agricultural crop.
Surplus
• Situation where quantity supplied is
greater than quantity demanded at a
given price.
Shortage
• Situation where quantity supplied is
less than quantity demanded at a
given price.
Equilibrium Price
• Price that clears the market.
Rebate
• Partial refund of the original price of
a product.
Price Ceiling
• Maximum legal price that can be
charged for a product.
Price Floor
• Lowest legal price that can be
charged for a product.
Target Prices
• Agricultural floor price set by the
government to stabilize farm
incomes.
List five advantages of Prices
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Prices are neutral.
Prices are flexible.
Freedom of Choice.
No Administrative Cost.
Prices are efficient.
List three problems with rationing.
• Question of Fairness
• High Administrative Cost
• Diminished Incentives
Describe two effects of having a fixed price
other than the equilibrium price forced on
a market.
• Shortages are created if price ceilings are
set below the equilibrium price.
• Surpluses are created if price floors are
set high than the equilibrium price.
Describe how surpluses and shortages
help the market find the equilibrium
price.
• Surpluses indicate that prices should be
lowered.
• Shortages indicate that prices should be
increased.
• Through this process, equilibrium
eventually will be reached.
Explain the importance of an
economic model.
• It shows how markets work by
helping analyze behavior and
predicts outcomes.
Pure Competition
• This market situation includes
independent and well-informed
buyers and sellers of exactly the
same economic product.
Monopolistic Competition
• This market situation has all the
conditions of pure competition
except for identical products.
Oligopoly
• Market situation in which a few very
large sellers of a product dominate.
Natural Monopoly
• Market situation where costs are
minimized by having a single firm
produce the product.
Technological Monopoly
• Market situation where a firm has a
monopoly because it owns or
controls a manufacturing method,
process, or other scientific advance.
Geographic Monopoly
• Market situation where a firm has a
monopoly because of its location or
the small size of the market.
Pure Monopoly
• Market situation with only one seller
of a particular economic product that
has no close substitutes.
Price War
• Series of price cuts by all producers
that may lead to unusually low prices
in the industry.
Price-fixing
• Agreeing to charge the same or
similar prices for a product.
Collusion
• A formal agreement to set prices or
to otherwise behave in a cooperative
manner.