1. Explain how the terms rationing and price are related?
Rationing is a system to allocate goods and services without the use of prices. Rationing is when people receive a ration coupon that entitles them to a certain amount of a product.

2. What alternative exists to the price system
What alternative exists to the price system? What challenges does this alternative present?
Rationing is an alternative to the price system. The challenges this alternative presents is perceived fairness, high cost of administration, potential for abuse, and a distortion of incentives to produce.

3. Why is the price system an efficient allocator of economic resources?
Prices are neutral, which means they are equally fair to both consumers and producers. They are flexible which means they can adapt to changing economic conditions. Prices are familiar which means that everyone understands how they work. Prices are efficient because the market determines prices largely on its own and without administration.

4. How do prices help us make decisions?
Prices help producers determine what and how much to produce. Prices help consumers determine what and how much to buy. When prices are high for a product, producers will produce more of that product, but consumers will buy less of it. When prices are low for a product, producers will produce less of that product, but consumers will buy more.

5. How do prices connect markets in an economy?
Prices connect markets because changes in one market create a ripple effect that is felt through prices in another market. For example: if there is a shortage of a raw material, it not only would raise the price of the raw material, it would raise the price of the products made from that material.

6. How is the equilibrium price of a product related to the equilibrium quantity, and how can these values be determined?
When the quantity supplied for a product is equal to the quantity demanded for the product, that quantity is the equilibrium quantity. The price of the product at the equilibrium quantity is the equilibrium price. At the equilibrium price and quantity, there is neither a surplus nor a shortage of the product.

7. How does price affect a seller’s decision to produce a product?
If the price consumers are willing to pay for a product is high, producers will produce more of that product. If the price consumers are willing to pay is low, producers will produce less or even none of it.

8. How do changes in supply and demand affect prices?
When demand for a product increases, the price increases. When demand for a product decreases, the price decreases. When supply of a product increases, the price decreases. When supply of a product decreases, the price increases.

9. Explain how target price for farm crops is an example of a price floor.
A target price is a price floor because it ensures a minimum price that farmers will receive for their product, in spite of what the market’s equilibrium price is for that product.

10. Why does the government impose price floors and price ceilings in certain markets?
The government sets price floors and price ceilings in order to achieve a socially desirable goal, such as economic equity or economic security. For example: the equilibrium price for an essential product may not be high enough to ensure farmers continue to produce it, so the government sets a price floor to ensure that the product is still produced. The government might set a price ceiling on a product essential for people to obtain but for which the equilibrium price is too high for many people to afford.

11. What are the costs and benefits of economic policies aimed at creating equity and security?
Economic policies aimed at economic equity and economic security, such as price floors and price ceilings, are beneficial because they ensure that essential goods and services remain available and affordable. However, such policies result in surpluses and shortages in the market because they set the price above or below what the market determines is the equilibrium price.

12. Whom do price supports benefit and whom do they hurt?
Price supports benefit producers because the supports ensure a price that is profitable to the producer. Supports hurt consumers, including other businesses and industries that rely on a supported product, because the price is usually higher than what consumers are willing or able to pay. Even so, price supports can ensure that essential goods continue to be produced, which benefits producers and consumers alike.

13. How do “markets” talk?
When prices increase or decrease, the market is “voicing” the collective opinion of buyers and sellers.