social goals vs. market efficiency chapter 6: section 3 kishan patel, harriotte davis, katherine...

SOCIAL GOALS VS. MARKET EFFICIENCY

CHAPTER 6: SECTION 3

KISHAN PATEL, HARRIOTTE DAVIS, KATHERINE BISHARA, SAVA PATEL

Main Idea• To achieve one or more of its social goals, government

sometimes sets prices.

Key Concepts• Describe the consequence of having a

fixed price in a market.• Explain how loan supports and deficiency

payments work.• Understand what it means when

“markets talk”.

Goals of a Market Economy• Two goals of a market economy are equity and security.

To protect these, the government sets price floors and price ceilings.

Vocabulary

• Price Ceiling – maximum legal price that can be charged for a product

• Ex.) Landlord wants $900

2 million apartments available

Government changes $600

Demand for 2.4 million

Landlord wants more money

Changes apartment into condos & office buildings

Supply of 1.6 million apartments

Shortage of 800,000

Vocab. Cont’d.• Price Floor – lowest legal price that can be paid for a

good or service• Minimum Wage – the lowest legal wage that can be

paid to most workers

• Ex.) Equilibrium price $4

12 million workers

Minimum wage $5.15

14 million workers

10 million hired

4 million surplus

Vocab. Cont’d.

• Nonrecourse loan – loan taken by farmers that carries neither a penalty or further obligation to repay if not paid back

• Commodity Credit Corporation (CCC) – an agency in the Department of Agriculture, to help stabilize agricultural prices

• Target Price – a price floor for farm products

Example of Nonrecourse Loan• Ex.) $4 per bushel target price for wheat

10,000 bushel produced

8,000 sold

2,000 picked up by CCC

Total of $40,000

Agricultural Price Support Programs

Vocabulary Cont’d• Deficiency Payments – Check sent to producers that makes up

the difference between the actual market price and the target price• Ex.) $4 target price

$2.50 open market

Sold 10,000

Difference $1.50

Difference x 10,000= paid $15,000

by gov’t

Agricultural Price Support Programs

“Markets Talk”• “Markets are said to talk when prices in them move up or

down significantly.” • For example, if the government were to raise taxes,

investors might sell some of their stocks for gold and cash. Stock prices fall, gold prices rise. The market responds to what investors feel is a good idea or a bad idea.

• If all were not against this new policy, only some, some investors would sell while others would buy.

Review Questions

1. Where does the equilibrium price lie on a graph?

A: The equilibrium price lies where the supply and demand curves intersect.

2. Which of these carry neither a penalty nor obligation to repay if not paid back?

A. Deficiency payments

B. Target price

C. Nonrecourse loan

D. Loan supports

Answer: C – Nonrecourse loan

True or False

3. Under the loan support program, a farmer borrows money from the CCC at the target price and pledges his/her crops as security in return.

A: True

4. ____________ are impersonal mechanisms that bring buyers and sellers together.

Markets

5. A price ceiling causes a ________. shortage