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1
Chapter 4Markets in Action
• Key Concepts• Summary• Practice Quiz• Internet Exercises
©2002 South-Western College Publishing
2
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
3
$1200
$600
$300
4 8 12 16
D1
The Effects of Shift in Demand on Market Equilibrium
D2
Shortage
$900S
P
Q
4
$40
$30
$10
10 20 30 40D2
S
D1
Surplus
$20
The Effects of Shift in Demand on Market Equilibrium
5
Increase in Demand
Increase in Equilibrium
Price
Increase in Quantity Supplied
6
Decrease in Demand
Decrease in Equilibrium
Price
Decrease in Quantity Supplied
7
What can cause a shift in a supply curve?
• Technology• Number of sellers in the market• Resource prices• Taxes and subsidies• Expectations of producers
8
$4
$1
20 40 60 80
D
Surplus$3
$2
S1
The Effects of Shift in Supply on Market Equilibrium
S2
9
$800
$200
2 4 6 8
D
Shortage
$600 S1S2
$400
The Effects of Shift in Supply on Market Equilibrium
10
Increase in Supply
Decrease in Equilibrium
Price
Increase in Quantity
Demanded
11
Decrease in Supply
Increase in Equilibrium
Price
Decrease in Quantity
Demanded
12
Can the laws of demand and supply be repealed?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
13
What are the two types of price controls?
Price ceilingsPrice floors
14
What is a price ceiling?A legally established maximum price a seller can charge
15
$800
$600
$400
$200
2 4 6 8
D
SRent Control Results in a Shortage of Rental Units
ShortageRent ceiling
P
Q
16
Rent Ceiling
Quantity Demanded exceeds the
quantity supplied
Shortage
17
What is the purpose of price ceilings on rent?
So needy people will pay lower rent than the equilibrium rent
18
Why may rent controls be counterproductive?
• Shortages• Illegal markets• Less maintenance• Discrimination
19
What are other examples of price
ceilings?Wage and price controlsUsury laws
20
What is a price floor?A legally established minimum price a seller can be paid
21
Wm
We
QD QE QS
D
S
A Minimum Wage Results in a Surplus of Labor
UnemploymentMinimum wage
22
Minimum wage
Unemployment
23
What are examples of price floors?
Minimum wage lawAgricultural price supports
24
Why do we have price ceilings and floors?Because of failures in
the free market
25
What is market failure?A situation in which the price system creates a problem for society or fails to achieve society’s goals
26
Who was Adam Smith?The father of modern economics who wrote The Wealth of Nations, published in 1776
27
What did Adam Smith say about competition?There must be competition for markets to function properly
28
What happens when competition is lacking?
Market failure results
29
$2000
$500
50 100 200
Rigging the Personal Computer Market
D
$1500
S
1
S2
$1000
250
$2500
300150
Inefficient equilibrium
Efficient equilibrium
30
What is an example of another market failure?
Externalities
31
What is an externality?A cost or benefit imposed on people other than the consumers and producers of a good or service
32
What is anegative externality?
An externality that is detrimental to third parties
33
What is an example of a negative externality?
Pollution
34
P2
Q1
External Cost of Pollution
P1
S1S2
Q2
Includes external costs of pollution
Excludes external costs of pollution
D
35
What is apositive externality?An externality that is beneficial to third parties
36
What is an example of a positive externality?
Vaccinations
37
$10
Q1 Q2
D1
S
External Benefits of AIDS Vaccinations
D2P1
Excludes Vaccination benefits
Includes Vaccination benefits
P2
38
External costs
Inefficient equilibrium
39
External benefits
Inefficient equilibrium
40
What is another example of a positive
externality?Public goods
41
What is a public good?A good that, once produced, has two properties:
(1) users collectively consume benefits
(2) no one can be excluded
42
What are examples of public goods?
• National defense• Public education• Roads
43
What is another example of
market failure?Income inequality
44
Key Concepts
45
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?
46
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?
47
Summary
48
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.
49
$800
$600
$400
$200
2 4 6 8
D
S
If a price ceiling is set below the equilibrium price, a shortage will persist
ShortageRent ceiling
P
Q
50
Wm
We
QD QE QS
D
S
If a price floor is set above the equilibrium price, a surplus will persist
UnemploymentMinimum wage
51
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.
52
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).
53
P2
Q1
External Cost of Pollution
P1
S1S2
Q2
Includes external costs of pollution
Excludes external costs of pollution
D
54Q1 Q2
D1
S
External Benefits of AIDS Vaccinations
D2P1
Excludes Vaccination benefits
Includes Vaccination benefits
P2
55
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.
56
END