Shortage and Surplus

1. Shortage occurs: When demand is greater than qty

supplied at the current price. If left alone (no gov’t interference),

prices will rise

2. Surplus: demand is less than supply at a given price….prices will fall

Price Controls

In a pure market, supply and demand determine prices. At times, gov’t. gets involved in setting prices. Why?

To protect consumers from unfair prices

To protect certain industries (often farming)

Price Ceilings

1. Price Ceiling: Gov’t set max. amount that can be charged

 Ex. 1: rent-controlled apartment in NYC

Ceilings often lead to shortages and non-market methods of distributing goods: rationing (as during WWII) black market (illegally high prices

charged for items in short supply)

Price Floors

2. “Price floors”: gov’t set minimum price that can be charged

Ex: Minimum wage law

Market Structures

1. Perfect Competition:4 Conditions:

1. Many buyers and sellers.2. Sellers offer identical products.3. Buyers and sellers are well informed.4. Easy entry and exit.

Market Structures 2. Monopoly Defined: A market

dominated by a single seller.

Usually leads to higher prices…no competition.

They are now illegal, but they weren’t always.

JDR: $675 billion If you counted $1 every second, it would take 21,000 years to count

Market Structures

2. Monopoly: There are also

government monopolies.

They ARE legal Why? Because some

industries have very high startup costs so it wouldn’t make sense to have more than one. EX: Electric company.

Market Structures

3. Monopolistic Competition

Four Conditions: 1. Many firms 2. Few artificial

barriers to entry. 3. Slight control over

price (Coke vs. store brand).

Differentiated Products.

Market Structures

4. Oligopoly Defined: A market structure

in which a few large firms dominate the industry (at least 70-80% of production).

Two important conditions: 1. High Barriers to Entry (Ex:

Airlines). 2. Cooperation and

Collusion. Ex: Cartels-----price fixing