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Price system

An economic system in which relative prices are constantly changing to reflect changes in supply and demand for different commodities. The prices of those commodities are signals to everyone in the system as to what is relatively scarce and what is relatively abundant.


Voluntary exchange

An act of trading, done on an elective basis, in which both parties to the trade expect to be better off after the exchange.


Transaction costs

All the cost associated with exchange, including the informational cost of finding out the price and quality, service record, and durability of a product, plus the cost of contracting and enforcing that contract.


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.


Price floor

A legal minimum price below which a good or service may not be sold. Legal minimum wages are an example.


Non-price rotating devices

All methods used to rotation scarce goods that are price controlled. Whenever the price system is not allowed to work, non price rotating devices will evolve to ration the affected goods and services.


Black market

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


Rent control

Price ceilings on rent.


Minimum wage

A wage floor, legislated by government, setting the lowest hourly rate that firms may legally pay workers.


Import quota

A physical supply restriction on imports of a particular good, such as sugar. Foreign exporters are unable to sell in the United States more than the quantity specified in the import quota.


Consumer surplus

The difference between the total amount that consumers would have been willing to pay for an item and the total amount that they actually pay.


Producer surplus

The difference between the total amount that producers actually receive for an item and the total amount that they would have been willing to accept for supplying that item.


Gains from trade

The sum of consumer surplus and producer surplus.