Transcript Chapter 5: Demand and Supply

5.2 How Do Demand and Price Interact?
 Demand is what people are willing and able to buy
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at various prices.
• Quantity demanded is a specific amount an
individual is willing and able to buy at a given price.
• A demand schedule is a table that shows the quantity
demanded at each price.
When the data are graphed, the result is a demand
curve.
The law of demand states that as price increases,
the quantity demanded for a good or service
decreases, and vice versa.
5.3 What Can Cause Demand to Change?
 Factors other than price can cause the entire demand
curve to shift. This is called
 a change in demand. These factors, called demand
shifters, include changes in
 consumer income,
 the number of consumers
 consumer tastes and preferences
 consumer expectations,
 the price of substitute goods, and the price of
complementary goods.
5.4 How Do Supply and Price Interact?
 Supply is what producers are willing and able to
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supply at various prices.
• Quantity supplied is the quantity producers are
willing and able to supply at a specific price.
• A supply schedule is a table that shows the quantity
supplied at different prices.
When the data are graphed, the result is a supply
curve.
The law of supply states that as price increases,
the quantity supplied for a good or service also
increases, and vice versa.
5.5 What Can Cause Supply to Change?
 Factors other than price can cause an entire supply
curve to shift. This is called a change in supply. These
factors, called supply shifters, include changes in the
 cost of inputs
 the number of producers
 conditions due to natural disasters or international
events
 Technology
 producer expectations
 government policy
5.6 What Is Demand Elasticity? What Factors
Influence It?
 Demand elasticity is the degree to which the quantity
demanded changes in response to a change in price.
 Factors that influence demand elasticity are
 availability of substitutes
 price relative to income
 necessities versus luxuries
 time needed to adjust to a price change.
5.7 What Is Supply Elasticity? What Factors
Influence It?
 Elasticity of supply measures the sensitivity of
producers to a change in price.
 If supply is elastic, producers will increase supply
significantly, even for a small increase in price. If
supply is inelastic, producers cannot easily increase
supply even for a big increase in price. Factors that
influence supply elasticity are
 availability and mobility of inputs
 storage capacity
 time needed to adjust to a price change.
6.2 What Happens When Demand Meets
Supply?
 In a perfectly competitive
market, demand and supply
work together to determine
prices.
 Direct and indirect
communication between
consumers and producers drives
prices to a market equilibrium
point at which the quantity
demanded and quantity
supplied are equal. On a graph,
the equilibrium point is the
point of intersection of the
demand and supply curves.
 Equilibrium price can also be
described as the marketclearing price, or the “right”
price. At this price, both
consumers and producers are
satisfied.
6.3 What Happens When
the Price Isn’t “Right”?
 When prices are set
above or below the
equilibrium price,
disequilibrium occurs:
 quantity demanded no
longer equals quantity
supplied. Equilibrium
quantity, as
determined by the
market equilibrium
point, is disrupted.
 When prices are too low,
excess demand leads to
shortages.
 When prices are too
high, excess supply leads
to surpluses. Adjusting
prices can restore
equilibrium.
6.4 How Do Shifts in Demand or Supply Affect
Markets?
 To analyze how an event will affect market
equilibrium, ask yourself these questions:
 • Does the event affect market demand, supply, or both?
 • Does the event shift the demand or supply curve to the
right (increase) or to the left (decrease)?
 • What are the new equilibrium price and quantity? How
have they changed as a result of the event?
6.5 What Roles Do Prices Play in a Modern
Mixed Economy?
 Prices convey information by signaling opportunity
cost to consumers and helping producers make
production decisions.
 Prices provide an incentive for firms and workers to
produce.
 Prices give markets flexibility to respond to changing
conditions.
 Prices guide scarce resources to their most efficient uses.
6.6 How Does
Government
Intervention
Affect
Markets?
 Because of political pressure, governments sometimes implement price controls when
prices are considered unfairly high for consumers or unfairly low for producers.
 • A price floor, such as minimum wage, prevents prices from going too low. The
result is excess supply, which causes a surplus.
 • A price ceiling, such as rent control, prevents prices from going too high. The
result is excess demand, which causes a shortage.
 Shortages may result in government-imposed rationing, the controlled distribution of
a limited supply of a good or service.
 Or they may create black markets, in which goods are traded at prices or in quantities
higher than allowed by the law.
7.2 What Is Perfect Competition, and Why Do
Economists Like It So Much?
 Businesses operate in different market structures, which are
primarily defined by the degree of competition among producers.
 Four characteristics are used to categorize market structures:
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number of producers
similarity of products
ease of entry
control over prices
 Perfect competition includes these beneficial characteristics:
many producers and consumers, identical products, easy entry into
the market, and prices determined by supply and demand.
 Furthermore, consumers have easy access to information about
products and prices, producers are forced to be as efficient as possible,
and consumers always get to pay the equilibrium price.
7.3 What Is a Monopoly, and Why Are Some
Monopolies Legal?
 Monopolies, oligopolies, and monopolistic
competition do not allocate resources efficiently.
 A monopoly is a market in which a single
producer provides unique products. It usually has
significant control over prices and less incentive to
satisfy consumers, making it the opposite of perfect
competition.
 Monopolies are often illegal, although governments
may allow beneficial monopolies to exist.
7.4 What Is an Oligopoly, and How Does It Limit
Competition?
 An oligopoly is a market in which a small number
of producers provide similar, but not identical,
goods.
 Firms in an oligopoly have some control over prices but
often set them in response to the decisions of other
firms.
 Because an oligopoly dominates the market, its effect
may be much like that of a monopoly.
 Illegal collusion may occur, and cartels may be created.
7.5 What Is Monopolistic Competition, and How Does
It Affect Markets?
 Monopolistic competition is a market in which
many producers provide similar but varied goods.
 Such markets are characterized by both price and
nonprice competition, in which firms compete
through differentiated product characteristics, service,
location, and brand image.
 To the extent that firms are able to monopolize their
own brands, they may have some control over prices.
However, such markets remain relatively competitive.
7.6 Market Failures: What Are Externalities and Public
Goods?
 When markets do not allocate goods and services efficiently, economists refer to
 them as market failures. Market failures include the three imperfect market
structures: monopolies, oligopolies, and monopolistic competition.
Externalities are spillover costs or benefits that affect someone other than the
producer or consumer.
 Negative externalities, such as pollution, tend to happen because producers are not
paying the full cost of their actions (their neighbors alsopay).
 Positive externalities have the opposite problem—they are underproduced.
 Why pay for a flu shot if most of the others in your community already got one?
Public goods are available for everyone to consume, whether or not those
people pay for them, and are defined as being nonexcludable and nonrival in
consumption.
 The market fails to provide public goods because private firms cannot make people
pay for their use (the free-rider problem); thus the government must provide them.