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