Transcript Document

Chapter 4
Markets in Action
• Key Concepts
• Summary
• Practice Quiz
• Internet Exercises
©2002 South-Western College Publishing
1
What can cause a shift
in a demand curve?
• Number of buyers in the market
• Tastes and preferences
• Income
• Expectations of consumers
• Prices of related goods
2
P
The Effects of Shift in Demand
on Market Equilibrium
$1200
S
$900
Shortage
$600
$300
D1
4
8
12
16
D2
Q
3
The Effects of Shift in Demand
on Market Equilibrium
$40
S
$30
Surplus
$20
$10
D1
D2
10
20
30
40
4
Increase in
Quantity
Supplied
Increase in
Equilibrium
Price
Increase in
Demand
5
Decrease in
Quantity
Supplied
Decrease in
Equilibrium
Price
Decrease
in Demand
6
What can cause a shift
in a supply curve?
• Technology
• Number of sellers in the market
• Resource prices
• Taxes and subsidies
• Expectations of producers
7
The Effects of Shift in Supply
on Market Equilibrium
$4
S1
$3
Surplus
S2
$2
$1
D
20
40
60
80
8
The Effects of Shift in Supply
on Market Equilibrium
$800
S2
$600
S1
Shortage
$400
$200
D
2
4
6
8
9
Increase in
Quantity
Demanded
Decrease in
Equilibrium
Price
Increase in
Supply
10
Decrease in
Quantity
Demanded
Increase in
Equilibrium
Price
Decrease
in Supply
11
Can the laws of demand
and supply be repealed?
In some markets, the
objective of politicians
is to prevent prices
from reaching the
equilibrium price
12
What are the two types
of price controls?
Price ceilings
Price floors
13
What is a price ceiling?
A legally established
maximum price a
seller can charge
14
P
Rent Control Results in a
Shortage of Rental Units
S
$800
$600
$400
Rent ceiling
Shortage
D
$200
2
4
6
8
Q
15
Shortage
Quantity Demanded
exceeds the
quantity supplied
Rent
Ceiling
16
What is the purpose of
price ceilings on rent?
So needy people will
pay lower rent than
the equilibrium rent
17
Why may rent controls
be counterproductive?
• Shortages
• Illegal markets
• Less maintenance
• Discrimination
18
What are other
examples of price
ceilings?
Wage and price controls
Usury laws
19
What is a price floor?
A legally established
minimum price a
seller can be paid
20
A Minimum Wage Results in
a Surplus of Labor
Wm
S
Minimum wage
Unemployment
We
D
QD
QE
QS
21
Unemployment
Minimum
wage
22
What are examples of
price floors?
Minimum wage law
Agricultural price supports
23
Why do we have price
ceilings and floors?
Because of failures in
the free market
24
What is market failure?
A situation in which the
price system creates a
problem for society or fails
to achieve society’s goals
25
Who was Adam Smith?
The father of modern
economics who wrote
The Wealth of Nations,
published in 1776
26
What did Adam Smith
say about competition?
There must be competition
for markets to function
properly
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What happens when
competition is lacking?
Market failure results
28
Rigging the Personal Computer Market
$2500 Inefficient equilibrium
$2000
S2
S
1
$1500
$1000
$500
Efficient equilibrium
D
50 100 150 200 250 300
29
What is an example of
another market failure?
Externalities
30
What is an externality?
A cost or benefit imposed
on people other than the
consumers and producers
of a good or service
31
What is a
negative externality?
An externality that is
detrimental to third parties
32
What is an example of
a negative externality?
Pollution
33
External Cost of Pollution
Includes external costs of pollution
S2 S
1
P2
P1
D
Excludes external costs of pollution
Q2
Q1
34
What is a
positive externality?
An externality that is
beneficial to third parties
35
What is an example of
a positive externality?
Vaccinations
36
External Benefits of AIDS Vaccinations
Includes Vaccination benefits
S
P2
P1
D2
$10
Excludes Vaccination benefits
Q1
Q2
D1
37
Inefficient
equilibrium
External
costs
38
Inefficient
equilibrium
External
benefits
39
What is another
example of a positive
externality?
Public goods
40
What is a public good?
A good that, once produced,
has two properties:
(1) users collectively
consume benefits
(2) no one can be excluded
41
What are examples of
public goods?
• National defense
• Public education
• Roads
42
What is another
example of
market failure?
Income inequality
43
Key Concepts
44
Key Concepts
•
•
•
•
•
•
•
What can cause a shift in a demand curve?
What can cause a shift in a supply curve?
What are the two types of price controls?
What is a price ceiling?
What is a price floor?
Why do we have price ceilings and floors?
What is market failure?
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Key Concepts cont.
•
•
•
•
•
•
What happens when competition is lacking?
What is an externality?
What is a negative externality?
What is a positive externality?
What is a public good?
What is another example of market failure?
46
Summary
47
Price ceilings and price floors are
maximum and minimum prices
enacted by law, rather than
allowing the forces of supply and
demand to determine prices. A
price ceiling is a maximum price
mandated by government, and a
price floor is a minimum legal price.
48
If a price ceiling is set below the
equilibrium price, a shortage will persist
P
S
$800
$600
$400 Rent ceiling
Shortage
D
$200
2
4
6
8
Q
49
If a price floor is set above the
equilibrium price, a surplus will persist
Wm
S
Minimum wage
Unemployment
We
D
QD
QE
QS
50
Market failure means that the
market mechanism does not
achieve desirable results. Sources
of market failure include lack of
competition, externalities, public
goods, and income inequality.
Although controversial, government
intervention is a possible way to
correct market failure.
51
An externality is a cost or benefit of
a good imposed on people who are
not buyers or sellers of that good.
Pollution is an example of an
external cost, which means too
many resources are used to
produce the product responsible for
the pollution. Two basic approaches
to solve this market failure are
taxes (like in pollution taxes) and
regulation (like in vaccinations).
52
External Cost of Pollution
Includes external costs of pollution
S2 S
1
P2
P1
D
Excludes external costs of pollution
Q2
Q1
53
External Benefits of AIDS Vaccinations
Includes Vaccination benefits
S
P2
P1
D2
Excludes Vaccination benefits
Q1
Q2
D1
54
Public goods are goods that are
consumed by everyone regardless
of whether they pay or not.
National defense, air traffic
control, and other public goods
can benefit many individuals
simultaneously and are provided
by the government.
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END
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