Review for Chapter 6 Test o 1

Review for Chapter 6 Test

o 1. Describe the four advantages of using price as an allocating mechanism. o Prices are neutral o Flexible o No administrative cost o Efficient

o 2. List three problems of allocating goods and services using nonpricerelated methods. o Lack of fairness o High adminstration costs o Lack of incentive

o 3. Explain the role of shortages and surpluses in a competitive market. o Shortage: quanitity demanded is greater then quanitity supplied and prices will go up o Surplus: the quanity supplied is greater than quanity demanded and prices will go down.

o 4. Describe three causes of price change in the market. o Change in supply o Change in demand o Change in both

o 5. Explain why shortages and surpluses are not temporary when prices are controlled? o At lower prices there is no incentive for producers to produce more, so shortages continue o At higher prices there is no incentive to buy, so surpluses remain.

o 6. Identify two programs that have been used to stabilize farm incomes. o Loan supports o Deficiency payments

o 7. Explain what is meant by the statement that markets talk. o The movement of prices up or down reflects the judgment of buyers and sellers.

Prices enable a market economy to adjust to unexpected events by o a. maintaining consumption and production at stable levels. o b. government rationing. o c. ensuring that producers always earn a profit. o d. adjusting consumption and production.

In a market economy, a high price signals ______

o If a competitive market is at equilibrium, and if there is a sudden increase in demand, then a temporary o a. surplus will occur and the price will increase. o b. shortage will occur and the price will fall. o c. surplus will occur and the price will fall. o d. shortage will occur and the price will increase.

Who do Deficiency payments assist?

The minimum wage law is an example of _____

In a competitive market, the adjustment process moves toward market _________.

Rent controls are an example of a _________

Why might a government interfere in a market economy by setting prices? o a. to achieve the goals of equity and security o b. to insure an entrepreneur’s profit o c. to distort market outcomes o d. to allow the price system to transmit accurate information

Price ceilings that are artificially low are likely to create _______