Chapter 4

Question 1

Define the “price system.”

Answer 1

An economic system in which relative prices are constantly changing to reflect changes in supply and demand for different commodities.

Question 2

True or False

The market system is the same as the price system.

Answer 2

True

Question 3

What is “voluntary exchange” in an economic sense?

Answer 3

A mutually agreed-upon trade in which both parties expect to benefit.

Question 4

True or False

The price of commodities are signals to everyone within the price system as to what is scarce and what is abundant.

Answer 4

True

Question 5

True or False

Individuals turn to markets because markets increase the cost of exchanges.

Answer 5

False. Markets decrease the cost of exchanges.

Question 6

What is a “transaction cost?”

Answer 6

All the costs involved with making exchanges.

Note: includes miney, manpower, time, etc

Question 7

True or False

In general, the more organized the market, the lower the transaction costs.

Answer 7

True

Question 8

What are platform firms?

Answer 8

Companies whose services link individuals who wish to make exchanges.

An example would be a distributor who buys food from farmers and sells it to supermarket chains.

Question 9

What is a key function of the “middle man.”

Answer 9

To reduce the transaction costs of buyers and sellers in the market of goods and services.

Question 10

Market equilibrium can change whenever there is a ______.

Answer 10

Shock caused by a change in a ceteris paribus condition for demand or supply.

Question 11

A shock to the supply and demand system can be represented by __________.

Answer 11

A shift in either the supply curve, demand curve, or both.

Question 12

When demand and supply increase, the equilibrium quantity ________.

Answer 12

Unambiguously rises.

Question 13

Decreases in both supply and demand tend to generate a _____ in quantity.

Answer 13

decrease

Question 14

When demand decreases and supply increases at the same time, the equilibrium price will ____.

Answer 14

Fall

Question 15

If demand increases and supply decreases at the same time, the equilibrium price will tend to _____.

Answer 15

Rise

Question 16

The synchronization of decisions by buyers and sellers that leads to equilibrium is called the _________.

Answer 16

Rationing function of prices.

Question 17

Whenever the rationing function of prices (RFP) is frustrated by government-enforced price ceilings that set prices below the market-clearing level, a ____ results.

Answer 17

Prolonged shortage

Question 18

True or False

The price system can be considered a form of rationing.

Answer 18

True

Question 19

True or False

Rationing via the price system is the most inefficient way of using resources.

Answer 19

False, the price system is the most efficient compared to rationing by queue or coupons.

Question 20

What are price controls?

Answer 20

Government-mandated minimum or maximum prices that may be charged for goods or services.

Question 21

If a price ceiling is below a market-clearing price, imposing a price ceiling will always create _____.

Answer 21

A shortage

Question 22

What is the definition of non-price rationing devices?

Answer 22

Methods used to ration scarce goods that are price-controlled.

Question 23

What is the general definition of a “black market.”

Answer 23

A market in which goods are traded at prices above their legal maximum prices or in which illegal goods are sold.

Question 24

What are the three functions of rent prices?

Answer 24

1. Promote efficient maintenance and promote new housing projects
2. Allocate existing scarce housing among competing claimants.
3. Ration the use of existing housing by current demanders.