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
