Ch 4 - Extensions of Supply and Demand

A set of 20 vocabulary flashcards covering core terms from Chapter 4: Extensions of Demand and Supply Analysis.

Price System (Market System)

An economic system in which constantly changing relative prices signal scarcity and abundance, guiding decisions of buyers and sellers.

Voluntary Exchange

A mutually beneficial act of trading between individuals in a market, leaving each party subjectively better off.

Transaction Costs

All costs associated with making an exchange, including information gathering, contracting, and enforcement expenses.

Middlemen

Intermediaries or brokers who reduce transaction costs by bringing buyers and sellers together and providing information.

Platform Firms

Companies whose services link people to others or to products via networks they operate, facilitating exchanges.

Price Flexibility

The degree to which prices adjust to changes in supply and demand; may include subtle adjustments like quality changes or hidden payments.

Rationing Function of Prices

The synchronization of buyers’ and sellers’ decisions through price changes that move markets toward equilibrium.

Price Ceiling

A government-imposed legal maximum price; if set below equilibrium it creates a shortage.

Price Floor

A government-imposed legal minimum price; if set above equilibrium it creates a surplus.

Black Market

A market in which goods subject to price controls are sold illegally at prices above the legal maximum.

Nonprice Rationing Devices

Methods such as queues, coupons, or force used to allocate scarce goods when prices are not allowed to rise.

Support Price

A specific price floor (often for farm products) that the government upholds by purchasing surplus or restricting supply.

Minimum Wage

A legislated wage floor setting the lowest hourly pay that employers may legally offer workers.

Import Quota

A government-mandated quantity restriction that limits the amount of a particular good that may be imported.

Consumer Surplus

The difference between what consumers are willing to pay for a good and what they actually pay.

Producer Surplus

The difference between the amount producers receive for a good and the minimum they would accept to supply it.

Gains from Trade

The total benefit to society, calculated as the sum of consumer surplus and producer surplus in a market.

Price Stickiness

The tendency of firms to change prices infrequently, often due to transaction costs, as evidenced by average 9-month intervals between adjustments in the U.S.

Quantity Restrictions

Government policies that ban or limit ownership, production, or sale of certain goods (e.g., organs, gold, hospital beds).

Rent Control

A price ceiling applied to housing rents that can lead to reduced construction, poor maintenance, and housing shortages.