Economics Unit Four PRICES AND MARKETS

PRICES What is the role of the price system? The price system is the language that guides producers and consumers to balance the forces of supply and demand. What are the benefits of the price system? InformationIncentivesChoice EfficiencyFlexibility

What are the limitations of the price system? Market failures are unaccounted costs not distributed in pricing. Externalities are side effects of production not directly connected with the production or consumption of the good and … …can be negative when someone who does not make or consume a certain product bears part of the cost of production or

…can be positive when someone who does not sell or buy a certain product benefits from its production. Public goods are any goods or services that are consumed by all members of a group. Instability results in pricing due to dramatic fluctuations in the supply and demand systems.

What is market equilibrium? Market equilibrium is the situation that occurs when the quantity supplied and the quantity demanded for a product are equal at the same time.

How does the price system handle product shortages and surpluses? surplus A surplus exists when the quantity supplied exceeds the quantity demanded at the price offered. Lowering the price increases the quantity demanded and decreases the quantity supplied, reaching equilibrium. shortage A shortage exists when the quantity demanded exceeds the quantity supplied at the price offered. Raising the price decreases the quantity demanded and increases the quantity supplied, reaching equilibrium.

The equilibrium shifts to a new intersection on the curve, depending on the nature of the shift. How do shifts in demand and supply affect market equilibrium? D$ S$ D$ $S

Why do governments sometimes set prices? Governments become involved in the market to remedy the limitations of the price system. What do governments try to do? Through price ceilings governments regulate a maximum price for a particular good. They try to make it more affordable. This tends to result in shortages since producers are less likely to supply at the artificial price.

Through price floors governments regulate a minimum price for a particular good. They try to make it more profitable This tends to result in surpluses since producers are more likely to supply at the artificial prices. Through rationing governments decide how to distribute a particular good. They try to make it more available. This tends to create inequity, adds additional costs, and encourages a black market for the good.

MARKET STRUCTURES What is perfect competition? Perfect competition is an ideal market structure in which buyers and sellers each compete directly and fully under the laws of supply and demand. perfect competition many buyers and sellers acting independently sellers can enter or exit the market easily sellers offer identical products buyers know the product well

What is monopolistic competition? A market in which producers offer a similar, but not identical, good or service. Producers differentiate their product from other similar products Consumers base buying decisions on non-price competition Producers increase profit by increasing demand for their product

How is an oligopoly structured? An oligopoly is a market structure in which a few large sellers control most of the production of a good or a service CONDITIONS Few large sellers Identical or similar products Difficult market entry PROPERTIES Non-price competition Interdependent pricing Collusion Cartel

What is a monopoly? A market structure of single seller controlling all production of a good or service monopoly other sellers cannot enter the market easily singleseller no close substitutes available

What types of monopolies exist? A natural monopoly is a market in which competition is inconvenient and impractical, and thus efficiency is best achieved by a single seller Example: public and private utilities A geographic monopoly is a market whose geographic area is so limited that a single seller can control an items manufacture, sale, distribution, or price. Example: rural, isolated services

Example: goods and services protected by patents and copyrights Example: public transportation structures, general welfare services A technological monopoly is a market that is dominated by a single producer because of new technology it has developed. A government monopoly is a market in which government is the sole producer or seller of a product.

What factors affect price in oligopolies and monopolies? Consumer demand Potential competition Government regulation What is meant by the term Era of Big Business? In the 1800s huge monopolies (called trusts) eliminated small companies throughout the major US industries. The government did little to intervene in the market system, allowing the natural forces to work. This represents laissez-faire economics.

What has the government done to monitor and regulate big business? Interstate Commerce Act (1887) created the Interstate Commerce Commission to oversee railroad rates; grew to regulate railroads, motor vehicles and other freight carriers. The Sherman Anti-Trust Act (1890) prohibited any agreements, contracts, or conspiracies that would restrain interstate trade or allow monopolies to form.

The Federal Trade Commission Act (1914) created the Federal Trade Commission to investigate charges of unfair methods of competition and commerce. The Clayton Antitrust Act (1914) clarified and strengthened the Sherman Act by prohibiting price discrimination, local price cutting, mergers that reduce competition, and exclusive sales contracts. The Parens Patriae Act (1976) gave states the right to sue companies accused of antitrust activity; required large companies to notify the government of planned mergers.