Chapter 4 Markets in Action

1. Chapter 4Markets in Action • Key Concepts • Summary • Practice Quiz • Internet Exercises ©2000 South-Western College Publishing

2. In this chapter, you will learn to solve these economic puzzles: How does the spotted owl affect the price of homes? Why might government warehouses overflow with cheese and milk? What do ticket scalping and rent controls have in common?

3. What can cause a shift in a Demand Curve? 1. Number of buyers in the market 2. Tastes and preferences 3. Income 4. Expectations of consumers 5. Prices of related goods * Return to previous slide while in slide show

4. P The Effects of Shift in Demand on Market Equilibrium $1200 S $900 Shortage $600 D2 $300 D1 Q 4 8 12 16

5. The Effects of Shift in Demand on Market Equilibrium $40 S $30 Surplus $20 D1 $10 D2 10 20 30 40

6. Increase in Quantity Supplied Increase in Equilibrium Price Increase in Demand

7. Decrease in Quantity Supplied Decrease in Equilibrium Price Decrease in Demand

8. What can cause a shift in a Supply Curve? 1. Number of sellers in the market 2. Technology 3. Resource prices 4. Taxes and subsidies 5. Expectations of producers

9. The Effects of Shift in Supply on Market Equilibrium $4 S1 S2 $3 Surplus $2 $1 D 20 40 60 80

10. The Effects of Shift in Supply on Market Equilibrium $800 S2 S1 $600 Shortage $400 $200 D 2 4 6 8

11. Increase in Quantity Demanded Decrease in Equilibrium Price Increase in Supply

12. Decrease in Quantity Demanded Increase in Equilibrium Price Decrease in Supply

13. Can the Laws of Demand and Supply be repealed?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

14. What are the two types of price controls? Price ceilings Price floors

15. What is a Price Ceiling? A legally established maximum price a seller can charge

16. P Rent Control Results in a Shortage of Rental Units S $800 $600 Rent ceiling Shortage $400 D $200 Q 2 4 6 8

17. Shortage Quantity Demanded exceeds the quantity supplied Rent Ceiling

18. What is the purpose of Price Ceilings on Rent? So needy people will pay lower rent than the equilibrium rent

19. Why may Rent Controls be counterproductive? • Shortages • Illegal markets • Less maintenance • Discrimination

20. What are other examples of Price Ceilings? Wage and price controls Usury laws

21. What is a Price Floor? A legally established minimum price a seller can be paid

22. A Minimum Wage Results in a Surplus of Labor S Wm Minimum wage Unemployment We D QD QE QS

23. Unemployment Minimum wage

24. What are examples of Price Floors? Minimum wage law Agricultural price supports

25. Why do we have Price Ceilings and Floors? Because of failures in the free market

26. What is Market Failure? A situation in which the price system creates a problem for society or fails to achieve society’s goals

27. Who was Adam Smith? The father of modern economics who wrote The Wealth of Nations, published in 1776

28. What did Adam Smith say about Competition? There must be competition for markets to function properly

29. What happens when Competition is lacking? Market failure results

30. Rigging the Personal Computer Market Inefficient equilibrium $2500 S1 S2 $2000 $1500 $1000 D Efficient equilibrium $500 50 100 150 200 250 300

31. What is an example of another Market Failure? Externalities

32. What is an Externality? A cost or benefit imposed on people other than the consumers and producers of a good or service

33. What is aNegative Externality? An externality that is detrimental to third parties

34. What is an example of a Negative Externality? Pollution

35. External Cost of Pollution Includes external costs of pollution S2 S1 P2 P1 D Excludes external costs of pollution Q2 Q1

36. What is aPositive Externality? An externality that is beneficial to third parties

37. What is an example of a Positive Externality? Vaccinations

38. External Benefits of AIDS Vaccinations Includes Vaccination benefits S P2 P1 D2 $10 Excludes Vaccination benefits D1 Q1 Q2

39. Inefficient equilibrium External costs

40. Inefficient equilibrium External benefits

41. What is another example of a Positive Externality? Public Goods

42. What is a Public Good? A good that, once produced, has two properties: (1) users collectively consume benefits (2) no one can be excluded

43. What are examples of Public Goods? • National defense • Public education • Roads

44. What is another example of Market Failure? Income inequality

45. Key Concepts

46. 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?

47. 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?

48. Summary

49. 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.

50. If a price ceiling is set below the equilibrium price, a shortage will persist P S $800 $600 Rent ceiling Shortage $400 D $200 Q 2 4 6 8