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Ch 6 Markets

Spalding Academy 10th Econ

QuestionAnswer
Allocative efficiency achieved when the firm produces the output most preferred by consumers
Decrease in demand Consumers are less willing and able to buy the product at every price
Decrease in supply Producers are less willing and able to supply the product at every price
Disequilibrium A mismatched between quantity demanded and quantity supplied as the market seeks equilibrium; usually temporary, except where government intervenes and sets the price
Equilibrium The quantity consumers are willing and able to buy equals the quantity producers are willing and able to sell
Increase in demand Consumers are more willing and able to buy the product at every price
Increase in supply Producers are more willing and able to buy the product at every price
Price ceiling A maximum legal price below which a product cannot be sold; to have an impact, a price ceiling must be set below the equilibrium price
Price floor A minimum legal price below which a product cannot be sold; to have an impact a price floor must be set below the equilibrium price
Productive efficiency Achieved when a firm produces at the lowest possible cost per unit
Shortage At a given price, the amount by which quantity demanded exceeds quantity supplied; a shortage usually forces the price up
Surplus At a given price, the amount by which quantity supplied exceeds quantity demanded; a surplus usually forces the prices down
Transaction cost the cost of time and information needed to carryout market exchange
Why do price ceiling lead to shortages? What is an example of a price ceiling? Firms are less willing to supply goods at this lower price. Firms supply less than what is demanded. Example: rent controlled apartments.
What happens to the equilibrium price and equilibrium quantity when supply decreases? Increase? Supply decrease: Eq. price is lower and eq. quantity is higher. Supply increase: Eq. price is higher and eq. quantity is lower.
What happens to the equilibrium price and equilibrium quantity when demand decreases? Increase? Demand decrease: Both eq. price and quantity are higher. Demand increase: Both eq price and quantity are lower.
How would the owner of a dress shop react if she found she had 30 extra prom dresses that she could not sell at the current price? Surplus of dresses indicates current price is above the equilibrium price. Owner must lower price to eliminate surplus
What would be the effect of a price ceiling at $1.75? No effect. Price is above the equilibrium point.
What would be the effect of a price floor at $1.50? Surplus. Price floor is above equilibrium price
Construct a graph using the information on review sheet (See example on board)
Created by: rejoyce431