1. Explain how the terms rationing and price are
related?
Rationing is a system to allocate goods and services without the use of
prices.
Rationing is when people receive a ration coupon that entitles them to
a certain amount of a product.
2. What alternative exists to the price system? What
challenges does this alternative present?
Rationing is an alternative to the price system. The challenges this
alternative presents is perceived fairness, high cost of administration,
potential for abuse, and a distortion of incentives to produce.
3. Why is the price system an efficient allocator
of economic resources?
Prices are neutral, which means they are equally fair to both consumers
and producers. They are flexible which means they can adapt to
changing economic conditions. Prices are familiar which means that
everyone understands how they work. Prices are efficient because the
market determines prices largely on its own and without
administration.
4. How do prices help us make decisions?
Prices help producers determine what and how much to produce.
Prices help consumers determine what and how much to buy. When
prices are high for a product, producers will produce more of that
product, but consumers will buy less of it. When prices are low for a
product, producers will produce less of that product, but consumers
will buy more.
5. How do prices connect markets in an
economy?
Prices connect markets because changes in one market create a ripple
effect that is felt through prices in another market. For example: if
there is a shortage of a raw material, it not only would raise the price of
the raw material, it would raise the price of the products made from
that material.
6. How is the equilibrium price of a product related
to the equilibrium quantity, and how can these
values be determined?
When the quantity supplied for a product is equal to the quantity
demanded for the product, that quantity is the equilibrium quantity.
The price of the product at the equilibrium quantity is the equilibrium
price. At the equilibrium price and quantity, there is neither a surplus
nor a shortage of the product.
7. How does price affect a seller’s decision to
produce a product?
If the price consumers are willing to pay for a product is high,
producers will produce more of that product. If the price consumers
are willing to pay is low, producers will produce less or even none of it.
8. How do changes in supply and demand affect
prices?
When demand for a product increases, the price increases. When
demand for a product decreases, the price decreases. When supply of
a product increases, the price decreases. When supply of a product
decreases, the price increases.
9. Explain how target price for farm crops is an
example of a price floor.
A target price is a price floor because it ensures a minimum price that
farmers will receive for their product, in spite of what the market’s
equilibrium price is for that product.
10. Why does the government impose price
floors and price ceilings in certain markets?
The government sets price floors and price ceilings in order to achieve
a socially desirable goal, such as economic equity or economic security.
For example: the equilibrium price for an essential product may not be
high enough to ensure farmers continue to produce it, so the
government sets a price floor to ensure that the product is still
produced. The government might set a price ceiling on a product
essential for people to obtain but for which the equilibrium price is too
high for many people to afford.
11. What are the costs and benefits of economic
policies aimed at creating equity and security?
Economic policies aimed at economic equity and economic security,
such as price floors and price ceilings, are beneficial because they
ensure that essential goods and services remain available and
affordable. However, such policies result in surpluses and shortages in
the market because they set the price above or below what the market
determines is the equilibrium price.
12. Whom do price supports benefit and whom
do they hurt?
Price supports benefit producers because the supports ensure a price
that is profitable to the producer. Supports hurt consumers, including
other businesses and industries that rely on a supported product,
because the price is usually higher than what consumers are willing or
able to pay. Even so, price supports can ensure that essential goods
continue to be produced, which benefits producers and consumers
alike.
13. How do “markets” talk?
When prices increase or decrease, the market is “voicing” the collective
opinion of buyers and sellers.
