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 • • • • • 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.