1. Chapter 4 Markets in Action
Lecture Slides
Survey of Economics Irvin B. Tucker
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2. What will I learn in this chapter?
How changes in supply and demand influence the equilibrium price and quantity of goods and services exchanged
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3. What else will I learn in this chapter?
You will study situations in which the market mechanism fails
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4. What causes a change in market equilibrium?
A change in demand
A change in supply
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5. Increase in Quantity Supplied Increase in Equilibrium Price
Increase in Demand
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6. Decrease in Quantity Supplied Decrease in Equilibrium Price
Decrease in Demand
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7. Increase in Quantity Demanded Decrease in Equilibrium Price
Increase in Supply
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8. Decrease in Quantity Demanded Increase in Equilibrium Price
Decrease in Supply
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9. Can the laws of demand and supply be repealed?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
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10. What are the two types of price controls?
Price ceilings
Price floors
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What is a price ceiling?
A legally established maximum price a seller can charge
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12. What is the purpose of price ceilings (rent control) on rent?
So needy people will pay lower rent than the equilibrium rent
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13. What is the result of price ceilings (rent control) on rent?
A shortage of rental units
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14. Quantity Demanded exceeds the quantity supplied
Shortage
Quantity Demanded exceeds the quantity supplied
Rent Ceiling
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15. Why may rent controls be counterproductive?
Shortages
Illegal markets
Less maintenance
Discrimination
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What is a price floor?
A legally established minimum price a seller can be paid
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17. What are examples of price floors?
Minimum wage law
Agricultural price supports
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What is the result of a price floor (minimum wage) on wages paid to labor?
A surplus of labor
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19. Unemployment (surplus)
Minimum wage
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20. © 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.
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21. What are some market failure situations?
Lack of Competition
Externalities
Public Goods
Income Inequality
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22. What happens when competition is lacking?
Market failure results
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Who is Adam Smith?
The father of modern economics who wrote The Wealth of Nations, published in 1776
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24. What did Adam Smith say about competition?
There must be competition for markets to function properly
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What is an externality?
A cost or benefit imposed on people other than the consumers and producers of a good or service (third parties).
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26. What is a negative externality?
An externality that is detrimental to third parties
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27. What is an example of a negative externality?
Pollution
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28. Efficient equilibrium Regulation, pollution taxes
External costs
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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
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30. What is a positive externality?
An externality that is beneficial to third parties
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31. What is an example of a positive externality?
Vaccinations
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32. Efficient equilibrium Regulation, special subsidies
External benefits
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What is the conclusion?
When externalities are present, market failure gives incorrect price and quantity signals, and resources are misallocated
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34. 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
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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)
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36. What are examples of public goods?
National defense
Public education
Roads
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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
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38. 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.
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END
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