Chapter 4 Markets in Action Lecture Slides Survey of Economics Irvin B. Tucker © 2011 South-Western, a part of Cengage Learning

What will I learn in this chapter? How changes in supply and demand influence the equilibrium price and quantity of goods and services exchanged © 2011 South-Western, a part of Cengage Learning

What else will I learn in this chapter? You will study situations in which the market mechanism fails © 2011 South-Western, a part of Cengage Learning

What causes a change in market equilibrium? A change in demand A change in supply © 2011 South-Western, a part of Cengage Learning

Increase in Quantity Supplied Increase in Equilibrium Price Increase in Demand © 2011 South-Western, a part of Cengage Learning

Decrease in Quantity Supplied Decrease in Equilibrium Price Decrease in Demand © 2011 South-Western, a part of Cengage Learning

Increase in Quantity Demanded Decrease in Equilibrium Price Increase in Supply © 2011 South-Western, a part of Cengage Learning

Decrease in Quantity Demanded Increase in Equilibrium Price Decrease in Supply © 2011 South-Western, a part of Cengage Learning

Can the laws of demand and supply be repealed?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 © 2011 South-Western, a part of Cengage Learning

What are the two types of price controls? Price ceilings Price floors © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning What is a price ceiling? A legally established maximum price a seller can charge © 2011 South-Western, a part of Cengage Learning

What is the purpose of price ceilings (rent control) on rent? So needy people will pay lower rent than the equilibrium rent © 2011 South-Western, a part of Cengage Learning

What is the result of price ceilings (rent control) on rent? A shortage of rental units © 2011 South-Western, a part of Cengage Learning

Quantity Demanded exceeds the quantity supplied Shortage Quantity Demanded exceeds the quantity supplied Rent Ceiling © 2011 South-Western, a part of Cengage Learning

Why may rent controls be counterproductive? Shortages Illegal markets Less maintenance Discrimination © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning What is a price floor? A legally established minimum price a seller can be paid © 2011 South-Western, a part of Cengage Learning

What are examples of price floors? Minimum wage law Agricultural price supports © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning What is the result of a price floor (minimum wage) on wages paid to labor? A surplus of labor © 2011 South-Western, a part of Cengage Learning

Unemployment (surplus) Minimum wage © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning What is market failure? A situation in which the price system results in too few or too many resources used in the production of a good or service. This inefficiency may justify government intervention. © 2011 South-Western, a part of Cengage Learning

What are some market failure situations? Lack of Competition Externalities Public Goods Income Inequality © 2011 South-Western, a part of Cengage Learning

What happens when competition is lacking? Market failure results © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning Who is Adam Smith? The father of modern economics who wrote The Wealth of Nations, published in 1776 © 2011 South-Western, a part of Cengage Learning

What did Adam Smith say about competition? There must be competition for markets to function properly © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning What is an externality? A cost or benefit imposed on people other than the consumers and producers of a good or service (third parties). © 2011 South-Western, a part of Cengage Learning

What is a negative externality? An externality that is detrimental to third parties © 2011 South-Western, a part of Cengage Learning

What is an example of a negative externality? Pollution © 2011 South-Western, a part of Cengage Learning

Efficient equilibrium Regulation, pollution taxes External costs © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning What is the conclusion? When the supply curve fails to include external costs, the equilibrium price is artificially low, and the equilibrium quantity is artificially high © 2011 South-Western, a part of Cengage Learning

What is a positive externality? An externality that is beneficial to third parties © 2011 South-Western, a part of Cengage Learning

What is an example of a positive externality? Vaccinations © 2011 South-Western, a part of Cengage Learning

Efficient equilibrium Regulation, special subsidies External benefits © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning What is the conclusion? When externalities are present, market failure gives incorrect price and quantity signals, and resources are misallocated © 2011 South-Western, a part of Cengage Learning

What is the effect of external costs and benefits on resources? External costs cause the market to overallocate resources, and external benefits cause the market to underallocate resources © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning What is a public good? A good that, once produced, has two properties: users collectively consume benefits no one can be excluded who who does not pay (free rider) © 2011 South-Western, a part of Cengage Learning

What are examples of public goods? National defense Public education Roads © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning What is the conclusion? If public goods are available only in the marketplace, people wait for someone else to pay, and the result is an underproduction or zero production of public goods © 2011 South-Western, a part of Cengage Learning

What is another example of market failure? Income inequality Government transfer programs such as social security,unemployment compensation, food stamps, and minimum wage are examples of programs that redistribute income. © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning END © 2011 South-Western, a part of Cengage Learning