1 Chapter 4 Markets in Action Key Concepts Key Concepts Summary Practice Quiz Internet Exercises 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 $ D1D1 The Effects of Shift in Demand on Market Equilibrium D2D2 Shortage $900 S P Q

4 $40 $30 $ D2D2 S D1D1 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 $ D Surplus $3 $2 S1S1 The Effects of Shift in Supply on Market Equilibrium S2S2

9 $800 $ D Shortage $600 S1S1 S2S2 $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12 Can the laws of demand and supply be repealed?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 ceilings Price floors

14 What is a price ceiling? A legally established maximum price a seller can charge

15 $800 $600 $400 $ D S Rent Control Results in a Shortage of Rental Units Shortage Rent 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 controls Usury laws

20 What is a price floor? A legally established minimum price a seller can be paid

21 WmWm WeWe QDQD QEQE QSQS D S A Minimum Wage Results in a Surplus of Labor Unemployment Minimum wage

22 Minimum wage Unemployment

23 What are examples of price floors? Minimum wage law Agricultural 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 societys 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 $ Rigging the Personal Computer Market D $1500 S1S1 S2S2 $ $ 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 a negative externality? An externality that is detrimental to third parties

33 What is an example of a negative externality? Pollution

34 P2P2 Q1Q1 External Cost of Pollution P1P1 S1S1 S2S2 Q2Q2 Includes external costs of pollution Excludes external costs of pollution D

35 What is a positive externality? An externality that is beneficial to third parties

36 What is an example of a positive externality? Vaccinations

37 $10 Q1Q1 Q2Q2 D1D1 S External Benefits of AIDS Vaccinations D2D2 P1P1 Excludes Vaccination benefits Includes Vaccination benefits P2P2

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 $ D S If a price ceiling is set below the equilibrium price, a shortage will persist ShortageRent ceiling P Q

50 WmWm WeWe QDQD QEQE QSQS D S If a price floor is set above the equilibrium price, a surplus will persist Unemployment Minimum 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 P2P2 Q1Q1 External Cost of Pollution P1P1 S1S1 S2S2 Q2Q2 Includes external costs of pollution Excludes external costs of pollution D

54 Q1Q1 Q2Q2 D1D1 S External Benefits of AIDS Vaccinations D2D2 P1P1 Excludes Vaccination benefits Includes Vaccination benefits P2P2

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