Chapter 7.4, Problem 1R

To determine

To explain the importance of various terms, Equilibrium price, Shortage, Surplus, Price ceiling, Rationing, Black market & Price floor.

Explanation of Solution

The significance of the terms are explained below:

·         Equilibrium price: The importance of the equilibrium price is high as it tells about the optimum point in the market where the producer’s supply is equal to the consumer’s demand. It is the price at which the producers are ready to sell the product and consumers are ready to purchase it with their full satisfaction.

·         Shortage: It is an important aspect as it tells about how short is the supply in the market and what is the unfulfilled demand of the consumer which tells about the loss of the producer which is incurred because of the lack of supply.

·         Surplus: It is of major significance as the surplus tells about the excess supply to which there is deficient demand in the market, which creates undesired or unplanned stocks with the producer or the seller.

·         Price ceiling: It is of high importance as it provides the consumers with the facility of a price fixed beyond which the producers are not allowed to sell the commodity. This helps the consumer with limited income & discourages the producers to charge monopoly prices.

·         Rationing: The major issue the economy faces isn’t the lack of resources but the lack of proper distribution of the resources, in which rationing helps in proper allocation of the commodities so that there can be the existence of equilibrium in the market & sustainable development of the economy.

·         Black market: It helps the real economy by creating an impact on the demand and supply not only of the goods and services but even of money. It is done through working outside the rules of the government avoiding the price controls and taxes.

·         Price floor: It is the minimum price set to prevail in the market for the commodities so that producers, especially farmers can get the required price of the product they are supplying in the market.

Economics Concept Introduction

Introduction:

Equilibrium price: It is the point at which the demand for goods and services is equal to the supply.

Shortage: It is a condition where the supply of the commodity is less than its demand in the market.

Surplus: It is a condition when the supply of the commodity is greater than the existing demand of the commodity.

Price ceiling: It is the price level fixed so that the market price should not exceed that level.

Rationing: It means the proper use of resources and its distribution so that there can be optimum utilization of the resources.

Black market: It is an economic activity performed ‘under the table’ & outside the government permitted channels.

Price floor: It is the level of price fixed so the equilibrium price should not fall below a certain level.