1.  1. Shortage occurs:  When demand is greater than qty supplied at the current price.  If left alone (no gov’t interference), prices will rise  2. Surplus: demand is less than supply at a given price….prices will fall

2.  In a pure market, supply and demand determine prices. At times, gov’t. gets involved in setting prices. Why?  To protect consumers from unfair prices  To protect certain industries (often farming)

3.  1. Price Ceiling: Gov’t set max. amount that can be charged  Ex. 1:rent-controlled apartment in NYC  Ceilings often lead to shortages and non- market methods of distributing goods:  rationing (as during WWII)  black market (illegally high prices charged for items in short supply)

4.  2. “Price floors”: gov’t set minimum price that can be charged  Ex: Minimum wage law

5.  1. Perfect Competition: 4 Conditions: 1. Many buyers and sellers. 2. Sellers offer identical products. 3. Buyers and sellers are well informed. 4. Easy entry and exit.

6.  2. Monopoly  Defined: A market dominated by a single seller.  Usually leads to higher prices…no competition.  They are now illegal, but they weren’t always.  JDR: $675 billion If you counted $1 every second, it would take 21,000 years to count

7.  2. Monopoly:  There are also government monopolies.  They ARE legal  Why? Because some industries have very high startup costs so it wouldn’t make sense to have more than one. EX: Electric company.

8.  3. Monopolistic Competition  Four Conditions:  1. Many firms  2. Few artificial barriers to entry.  3. Slight control over price (Coke vs. store brand).  Differentiated Products.

9.  4. Oligopoly  Defined: A market structure in which a few large firms dominate the industry (at least 70-80% of production).  Two important conditions:  1. High Barriers to Entry (Ex: Airlines).  2. Cooperation and Collusion.  Ex: Cartels-----price fixing