Econ B Ch4-6 - CH 4 Price System(market system relative...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
CH 4 Price System (market system)- relative prices are constantly changing to reflect changes in supply and demand for different commodities. Voluntary Exchange- act of trading between individuals that make both parties to the trade subjectively better off. Transaction Costs- the costs associated with finding out exactly what is being transacted as well as the cost of enforcing contracts. Middlemen specialize in lowering transaction costs. Changes in Supply and Demand Increase in demand leads to higher equilibrium prices and higher equilibrium quantity. Increase in supply leads to lower equilibrium prices, and higher equilibrium quantity. Decrease in demand leads to lower equilibrium prices and lower equilibrium quantity. Decrease in supply leads to higher equilibrium prices, and lower equilibrium quantity. When both supply and demand increase, equilibrium unambiguously rises; rise in quantity When both supply and demand decrease, equilibrium falls; decrease in quantity Price flexibility may take the form of subtle adjustments such as hidden payments or quality changes. There are many ways to implicitly change prices without actually changing the published price for a nominal unit of a product or service. Unfettered Market Systems- there are no restrictions on changes in prices and quantities The decisions of buyers and sellers that leads to equilibrium is called the rationing function of prices. Method of Nonprice Rationing First come, first serve- rationing by queues “lines” Political Power Physical Force Random Assignment or Coupons Price Controls- Government mandated minimum or maximum prices that may be charged for goods and services Price Ceiling- A legal maximum price that may be charged for a particular good or service. Leads to shortages Price Floor- A legal minimum price below which a good or service may not be sold. (Minimum wage) leads to surplus When a price ceiling is set below the market clearing there will always be a shortage- higher demand with lower supply. This results in nonprice rationing devices- all methods used to ration scarce goods that are price controlled.
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern