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Macroeconomics: Chapter 4

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Terms in this set (24)

  • What is the price system or market system?
    An economic system where relative prices constantly change to reflect changes in supply and demand, signaling scarcity and abundance.
  • What is voluntary exchange in the price system?
    A trade between individuals that makes both parties subjectively better off.
  • What are transaction costs?
    Costs associated with exchange, including finding price and quality information, contracting, and enforcing agreements.
  • What role do intermediaries play in markets?
    They specialize in lowering transaction costs by linking buyers and sellers.
  • How do changes in demand affect equilibrium price and quantity?
    Increases in demand raise both equilibrium price and quantity; decreases lower both.
  • How do changes in supply affect equilibrium price and quantity?
    Increases in supply lower equilibrium price and raise quantity; decreases raise price and lower quantity.
  • What happens when both demand and supply increase simultaneously?
    Equilibrium quantity increases unambiguously; the change in equilibrium price is indeterminate.
  • What is the rationing function of prices?
    Prices synchronize buyer and seller decisions, rationing scarce goods efficiently.
  • Name some nonprice rationing methods.
    Rationing by queues, random assignment or coupons, power, and physical force.
  • What is a price ceiling?
    A government-imposed legal maximum price for a good or service.
  • What is the effect of a price ceiling set below equilibrium price?
    It creates a shortage because quantity demanded exceeds quantity supplied.
  • What are black markets in the context of price ceilings?
    Markets where price-controlled goods are traded illegally above the legal maximum price.
  • What is rent control?
    Price ceilings on rents intended to keep rental prices below market equilibrium.
  • What are the consequences of rent controls?
    Shortages of rental units, reduced maintenance, discouraged new construction, and rationing of housing.
  • What is a price floor?
    A government-mandated legal minimum price for a good or service.
  • What happens when a price floor is set above the market clearing price?
    It results in a surplus because quantity supplied exceeds quantity demanded.
  • What is a minimum wage?
    A wage floor set by law that establishes the lowest hourly wage firms can pay workers.
  • How can a higher minimum wage affect employment?
    It can increase wages for employed workers but may reduce total employment and hours worked.
  • What are quantity restrictions imposed by governments?
    Bans or licensing requirements that limit or prohibit the ownership, trading, or production of certain goods.
  • What is an import quota?
    A physical limit on the quantity of a good that foreign exporters can sell in a country.
  • Define consumer surplus.
    The difference between what consumers are willing to pay and what they actually pay.
  • Define producer surplus.
    The difference between what producers receive and the minimum they would accept.
  • What are gains from trade within a price system?
    The sum of consumer surplus and producer surplus.
  • How do price controls affect gains from trade?
    Both consumer and producer surplus decrease, reducing total gains from trade.