Goverment interference into the price mechanism

Price ceiling - a maximum price allowed by the government. It is always below the equilibrium price.

Price floor - a minimum price allowed by the government.It is always above the market equilibrium level.

Government can also interfere into price mechanism by means of taxes and subsidies.

Opportunity cost – cost measured in terms in the best alternative forgone.

Rational choice – choice that involves weighing up the benefit of any activity against its opportunity cost.

Marginal cost – the additional cost of doing a little bit more of an activity.

Marginal benefit – the additional benefit of doing a little bit more of an activity.

Economic model – a formal presentation of an economic theory.

Basic assumption – is a proposition that is taken for granted, that is, as if it were known to be true.