EconomicsEconomics

Unit Four

PRICES AND MARKETSPRICES AND MARKETS

PRICESPRICESWhat is the role of the price system?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?What are the benefits of the price system?

Information

Incentives Choice

Efficiency Flexibility

What are the limitations of the price system?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?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 How does the price system handle product shortages and surpluses?shortages and surpluses?

A surplussurplus 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.

A shortageshortage 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 How do shifts in demand and supply affect market equilibrium?market equilibrium?

D $

S $

D $

$ S

Why do governments sometimes set prices?Why do governments sometimes set prices?

Governments become involved in the market to Governments become involved in the market to remedy the limitations of the price system.remedy the limitations of the price system.

What do governments try to do?What do governments try to do?

Through price ceilings governments regulate a Through price ceilings governments regulate a maximum price for a particular good. They try maximum price for a particular good. They try to make it more affordable.to make it more affordable.

This tends to result in shortages since This tends to result in shortages since producers are less likely to supply at the producers are less likely to supply at the artificial price.artificial price.

Through Through price floorsprice floors governments regulate a governments regulate a minimum price for a particular good. They try minimum price for a particular good. They try to make it more profitableto make it more profitable

This tends to result in surpluses since producers This tends to result in surpluses since producers are more likely to supply at the artificial prices.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 This tends to create inequity, adds additional costs, and encourages a black market for the costs, and encourages a black market for the good.good.

MARKET STRUCTURESMARKET STRUCTURESWhat is perfect competition?What is perfect competition?Perfect competition is an ideal market structure Perfect competition is an ideal market structure in which buyers and sellers each compete in which buyers and sellers each compete directly and fully under the laws of supply and directly and fully under the laws of supply and demand.demand.

perfect competition

many buyers and sellers acting independently

sellers can enter or exit the market easily

sellers sellers offer offer

identical identical productsproducts

buyers buyers know know the the

product product well well

What is monopolistic competition?What is monopolistic competition?

A market in which producers offer a similar, but A market in which producers offer a similar, but not identical, good or service.not identical, good or service.

Producers differentiate their product Producers differentiate their product from other similar productsfrom other similar products

Consumers base buying decisions on Consumers base buying decisions on non-price competitionnon-price competition

Producers increase profit by increasing Producers increase profit by increasing demand for their productdemand for their product

How is an oligopoly structured?How is an oligopoly structured?

An oligopoly is a market structure in which a An oligopoly is a market structure in which a few large sellers control most of the production few large sellers control most of the production of a good or a serviceof a good or a service

CCOONNDDIITTIIOONNSS

Few large sellersFew large sellers

Identical or Identical or similarsimilarproductsproducts

Difficult Difficult market market entryentry

PPRROOPPEERRTTIIEESS

Non-price Non-price competitioncompetition

InterdependenInterdependent pricingt pricing

CollusionCollusion

CartelCartel

What is a monopoly?What is a monopoly?

A market structure of single seller controlling all A market structure of single seller controlling all production of a good or serviceproduction of a good or service

monopoly

other sellers cannot enter the market easily

single single sellerseller

no close no close substitutesubstitutes availables available

What types of monopolies exist?What types of monopolies exist?

A A natural monopolynatural monopoly is a market in which is a market in which competition is inconvenient and impractical, competition is inconvenient and impractical, and thus efficiency is best achieved by a single and thus efficiency is best achieved by a single sellerseller Example: public and private

utilities

A A geographic monopolygeographic monopoly is a market whose is a market whose geographic area is so limited that a single seller geographic area is so limited that a single seller can control an item’s manufacture, sale, can control an item’s manufacture, sale, distribution, or price.distribution, or price.

Example: rural, isolated services

Example: goods and services protected by patents and copyrights

Example: public transportation structures, general welfare services

A A technological monopolytechnological monopoly is a market that is is a market that is dominated by a single producer because of new dominated by a single producer because of new technology it has developed.technology it has developed.

A A government monopoly government monopoly is a market in which is a market in which government is the sole producer or seller of a government is the sole producer or seller of a product.product.

What factors affect price in oligopolies and What factors affect price in oligopolies and monopolies?monopolies?

Consumer Consumer demanddemandPotential Potential

competitioncompetitionGovernment regulationGovernment regulation

What is meant by the term “Era of Big What is meant by the term “Era of Big Business”?Business”?In the 1800s huge monopolies (called In the 1800s huge monopolies (called truststrusts) ) eliminated small companies throughout the eliminated small companies throughout the major US industries. The government did little major US industries. The government did little to intervene in the market system, allowing the to intervene in the market system, allowing the natural forces to work. This represents natural forces to work. This represents laissez-laissez-fairefaire economics. economics.

What has the government done to monitor and What has the government done to monitor and regulate big business?regulate big business?

Interstate Commerce ActInterstate Commerce Act (1887) created the (1887) created the Interstate Commerce Commission to oversee Interstate Commerce Commission to oversee railroad rates; grew to regulate railroads, motor railroad rates; grew to regulate railroads, motor vehicles and other freight carriers.vehicles and other freight carriers.

The The Sherman Anti-Trust ActSherman Anti-Trust Act (1890) prohibited (1890) prohibited any agreements, contracts, or conspiracies that any agreements, contracts, or conspiracies that would restrain interstate trade or allow would restrain interstate trade or allow monopolies to form.monopolies to form.

The The Federal Trade Commission ActFederal Trade Commission Act (1914) (1914) created the Federal Trade Commission to created the Federal Trade Commission to investigate charges of unfair methods of investigate charges of unfair methods of competition and commerce.competition and commerce.

The The Clayton Antitrust ActClayton Antitrust Act (1914) clarified and (1914) clarified and strengthened the Sherman Act by prohibiting strengthened the Sherman Act by prohibiting price discrimination, local price cutting, mergers price discrimination, local price cutting, mergers that reduce competition, and exclusive sales that reduce competition, and exclusive sales contracts.contracts.

The The Parens Patriae ActParens Patriae Act (1976) gave states the (1976) gave states the right to sue companies accused of antitrust right to sue companies accused of antitrust activity; required large companies to notify the activity; required large companies to notify the government of planned mergers.government of planned mergers.