Chapter 4Markets in Action  • Key Concepts  • Summary  • Practice Quiz  • Internet Exercises     ©2000 South-Western Colle...
In this chapter, you will  learn to solve these   economic puzzles: Why might the spotted What does government  How do tic...
What can cause a shift  in a Demand Curve?1. Number of buyers in the market2. Tastes and preferences3. Income4. Expectatio...
P         The Effects of Shift in Demand on                  Market Equilibrium$1200                                S$900 ...
The Effects of Shift in Demand on                 Market Equilibrium$40                              S$30            Surpl...
Increase in                             Quantity                             Supplied              Increase in            ...
Decrease in                             Quantity                             Supplied              Decrease in            ...
What can cause a shift   in a Supply Curve?1. Number of sellers in the market2. Technology3. Resource prices4. Taxes and s...
The Effects of Shift in Supply on           Market Equilibrium$4                     S1          S2$3               Surplu...
The Effects of Shift in Supply on                Market Equilibrium$800                           S2$600                  ...
Increase in                             Quantity                            Demanded              Decrease in             ...
Decrease in                             Quantity                            Demanded              Increase in             ...
Can the Laws of Demandand Supply be repealed?  In some markets, the   objective of politicians   is to prevent prices   fr...
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
P     Rent Control Results in a        Shortage of Rental Units$800                                    S$600$400 Rent ceil...
Shortage              Quantity             Demanded            exceeds the          quantity supplied RentCeiling         ...
What is the purpose ofPrice Ceilings on Rent? So needy people will  pay lower rent than  the equilibrium rent             ...
Why may Rent Controlsbe counterproductive?   • Shortages   • Illegal markets   • Less maintenance   • Discrimination      ...
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
A Minimum Wage Results                      in a Surplus of LaborWm   Minimum wage                            S           ...
UnemploymentMinimum wage                 23
What are examples of  Price Floors?Minimum wage lawAgricultural price supports                    24
Why do we have PriceCeilings 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 society’s g...
Who was Adam Smith? The father of modern  economics who wrote  The Wealth of Nations,  published in 1776                  ...
What did Adam Smith say about Competition?There must be competition for markets to function properly                      28
What happens whenCompetition is lacking?  Market failure results                     29
Rigging the Personal Computer Market$2500   Inefficient equilibrium$2000                      S2          S1$1500$1000$500...
What is an example ofanother 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    ...
What is a Negative Externality?An externality that is detrimental to third parties                      33
What is an example of aNegative Externality?      Pollution                 34
External Cost of PollutionIncludes external costs of pollution P2                        S2          S1  P1               ...
What is a  Positive Externality?An externality that is beneficial to third parties                      36
What is an example of a Positive Externality?    Vaccinations                 37
External Benefits of AIDS Vaccinations     Includes Vaccination benefits                                 S P2P1           ...
Inefficient           equilibriumExternal costs                  39
Inefficient           equilibriumExternalbenefits                  40
What is another exampleof 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...
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...
Key Concepts cont.•   What happens when Competition is lacking?•   What is an Externality?•   What is a Negative Externali...
Summary          48
Price ceilings and price floorsare maximum and minimum pricesenacted by law, rather than allowingthe forces of supply and ...
If a price ceiling is set below the  P    equilibrium price, a shortage will persist$800                                  ...
If a price floor is set above the          equilibrium price, a surplus will persistWm   Minimum wage                     ...
Market failure means that themarket mechanism does not achievedesirable results. Sources of marketfailure include lack of ...
An externality is a cost or benefitof a good imposed on people who arenot buyers or sellers of that good.Pollution is an e...
External Cost of PollutionIncludes external costs of pollution P2                        S2          S1  P1               ...
External Benefits of AIDS Vaccinations     Includes Vaccination benefits                                 SP2P1            ...
Public goods are goods that areconsumed by everyone regardless ofwhether they pay or not. Nationaldefense, air traffic con...
Chapter 4 Quiz  ©2000 South-Western College Publishing                                           57
1. Suppose prices for new homes have risen, yet  sales of new homes have also risen. We can  conclude that   a. the demand...
An increase in demand for new homes                             SP2P1                                   D2                ...
2. Which of the following statements if true of a  market?   a. An increase in demand, with no change in     supply, will ...
3. Consider the market for chicken. An increase  in the price of beef will   a. decrease the demand for chicken, creating ...
4. An increase in consumer income increases the  demand for oranges. As a result of the  adjustment to a new equilibrium, ...
P         The Effects of Shift in Demand on                  Market Equilibrium$1200                                S$900 ...
5. An increase in the wage paid to grape  pickers will cause the   a. demand curve for grapes to shift to the     right, r...
P        The Effects of Shift in Supply on                Market Equilibrium$800                           S2$600         ...
6. If the federal government wants to raise the   price of cheese, it will    a. take cheese from government storage and  ...
P        The Effects of Shift in Supply on                Market Equilibrium$800                           S2$600         ...
7. Which of the following is least likely to  result from rent controls set below the  equilibrium price for rental housin...
8. Suppose the equilibrium price set by supply   and demand is lower than the price ceiling   set by the government. The r...
P     Rent Control Results in a        Shortage of Rental Units$800                                    S$600$400 Price cei...
9. A good that provides external benefits to society  has   a. too few resources devoted to production.   b. too many reso...
10. Pollution from cars is an example of a   (an)    a. harmful opportunity cost.    b. negative externality.    c. produc...
11. Which of the following is the best  example of a public good?   a. Pencils.   b. Education.   c. Defense.   d. Trucks....
12. A public good may be defined as any  good or service that   a. allows users to collectively consume     benefits.   b....
Internet ExercisesClick on the picture of the book, choose updates by chapter for the latest internet exercises           ...
END      76
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04 markets in action

  1. 1. Chapter 4Markets in Action • Key Concepts • Summary • Practice Quiz • Internet Exercises ©2000 South-Western College Publishing 1
  2. 2. In this chapter, you will learn to solve these economic puzzles: Why might the spotted What does government How do ticket scalping warehouses overflow with and rent controls have owl affect the price cheese and milk? in common? of homes? 2
  3. 3. What can cause a shift in a Demand Curve?1. Number of buyers in the market2. Tastes and preferences3. Income4. Expectations of consumers5. Prices of related goods* Return to previous slide while in slide show 3
  4. 4. P The Effects of Shift in Demand on Market Equilibrium$1200 S$900 Shortage$600$300 D2 D1 4 8 12 16 4 Q
  5. 5. The Effects of Shift in Demand on Market Equilibrium$40 S$30 Surplus$20$10 D1 D2 10 20 30 40 5
  6. 6. Increase in Quantity Supplied Increase in Equilibrium PriceIncrease in Demand 6
  7. 7. Decrease in Quantity Supplied Decrease in Equilibrium PriceDecrease in Demand 7
  8. 8. What can cause a shift in a Supply Curve?1. Number of sellers in the market2. Technology3. Resource prices4. Taxes and subsidies5. Expectations of producers 8
  9. 9. The Effects of Shift in Supply on Market Equilibrium$4 S1 S2$3 Surplus$2$1 D 20 40 60 80 9
  10. 10. The Effects of Shift in Supply on Market Equilibrium$800 S2$600 S1 Shortage$400$200 D 2 4 6 8 10
  11. 11. Increase in Quantity Demanded Decrease in Equilibrium PriceIncrease in Supply 11
  12. 12. Decrease in Quantity Demanded Increase in Equilibrium PriceDecrease in Supply 12
  13. 13. Can the Laws of Demandand Supply be repealed? In some markets, the objective of politicians is to prevent prices from reaching the equilibrium price 13
  14. 14. What are the two types of price controls? Price ceilings Price floors 14
  15. 15. What is a Price Ceiling? A legally established maximum price a seller can charge 15
  16. 16. P Rent Control Results in a Shortage of Rental Units$800 S$600$400 Rent ceiling Shortage$200 D 2 4 6 8 Q 16
  17. 17. Shortage Quantity Demanded exceeds the quantity supplied RentCeiling 17
  18. 18. What is the purpose ofPrice Ceilings on Rent? So needy people will pay lower rent than the equilibrium rent 18
  19. 19. Why may Rent Controlsbe counterproductive? • Shortages • Illegal markets • Less maintenance • Discrimination 19
  20. 20. What are other examples of Price Ceilings? Wage and price controls Usury laws 20
  21. 21. What is a Price Floor? A legally established minimum price a seller can be paid 21
  22. 22. A Minimum Wage Results in a Surplus of LaborWm Minimum wage S UnemploymentWe D QD QE QS 22
  23. 23. UnemploymentMinimum wage 23
  24. 24. What are examples of Price Floors?Minimum wage lawAgricultural price supports 24
  25. 25. Why do we have PriceCeilings and Floors? Because of failures in the free market 25
  26. 26. What is Market Failure?A situation in which the price system creates a problem for society or fails to achieve society’s goals 26
  27. 27. Who was Adam Smith? The father of modern economics who wrote The Wealth of Nations, published in 1776 27
  28. 28. What did Adam Smith say about Competition?There must be competition for markets to function properly 28
  29. 29. What happens whenCompetition is lacking? Market failure results 29
  30. 30. Rigging the Personal Computer Market$2500 Inefficient equilibrium$2000 S2 S1$1500$1000$500 Efficient equilibrium D 50 100 150 200 250 300 30
  31. 31. What is an example ofanother Market Failure? Externalities 31
  32. 32. What is an Externality?A cost or benefit imposed on people other than the consumers and producers of a good or service 32
  33. 33. What is a Negative Externality?An externality that is detrimental to third parties 33
  34. 34. What is an example of aNegative Externality? Pollution 34
  35. 35. External Cost of PollutionIncludes external costs of pollution P2 S2 S1 P1 DExcludes external costs of pollution Q2 Q1 35
  36. 36. What is a Positive Externality?An externality that is beneficial to third parties 36
  37. 37. What is an example of a Positive Externality? Vaccinations 37
  38. 38. External Benefits of AIDS Vaccinations Includes Vaccination benefits S P2P1 D2$10 Excludes Vaccination benefits D1 Q1 Q2 38
  39. 39. Inefficient equilibriumExternal costs 39
  40. 40. Inefficient equilibriumExternalbenefits 40
  41. 41. What is another exampleof a Positive Externality? Public Goods 41
  42. 42. 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
  43. 43. What are examples of Public Goods? • National defense • Public education • Roads 43
  44. 44. What is another example of Market Failure? Income inequality 44
  45. 45. Key Concepts 45
  46. 46. 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
  47. 47. 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
  48. 48. Summary 48
  49. 49. Price ceilings and price floorsare maximum and minimum pricesenacted by law, rather than allowingthe forces of supply and demand todetermine prices. A price ceiling is amaximum price mandated bygovernment, and a price floor is aminimum legal price. 49
  50. 50. If a price ceiling is set below the P equilibrium price, a shortage will persist$800 S$600$400 Rent ceiling Shortage$200 D 2 4 6 8 Q 50
  51. 51. If a price floor is set above the equilibrium price, a surplus will persistWm Minimum wage S UnemploymentWe D QD QE QS 51
  52. 52. Market failure means that themarket mechanism does not achievedesirable results. Sources of marketfailure include lack of competition,externalities, public goods, and incomeinequality. Although controversial,government intervention is a possibleway to correct market failure. 52
  53. 53. An externality is a cost or benefitof a good imposed on people who arenot buyers or sellers of that good.Pollution is an example of an externalcost, which means too many resourcesare used to produce the productresponsible for the pollution. Two basicapproaches to solve this market failureare taxes (like in pollution taxes) andregulation (like in vaccinations). 53
  54. 54. External Cost of PollutionIncludes external costs of pollution P2 S2 S1 P1 DExcludes external costs of pollution Q2 Q1 54
  55. 55. External Benefits of AIDS Vaccinations Includes Vaccination benefits SP2P1 D2 Excludes Vaccination benefits D1 Q1 Q2 55
  56. 56. Public goods are goods that areconsumed by everyone regardless ofwhether they pay or not. Nationaldefense, air traffic control, and otherpublic goods can benefit manyindividuals simultaneously and areprovided by the government. 56
  57. 57. Chapter 4 Quiz ©2000 South-Western College Publishing 57
  58. 58. 1. Suppose prices for new homes have risen, yet sales of new homes have also risen. We can conclude that a. the demand for new homes has risen. b. the law of demand has been violated. c. new firms have entered the construction industry. d. construction firms must be facing higher costs. A. The demand for new homes has risen causing the price to increase and the quantity of new homes to increase as illustrated on the next page. 58
  59. 59. An increase in demand for new homes SP2P1 D2 D1 Q1 Q2 59
  60. 60. 2. Which of the following statements if true of a market? a. An increase in demand, with no change in supply, will increase the equilibrium price and quantity. b. An increase in supply, with no change in demand, will decrease the equilibrium price and the equilibrium quantity. c. A decrease in supply, with no change in demand, will decrease the equilibrium price and increase the equilibrium quantity. d. all of the above are true.A. See previous graph. 60
  61. 61. 3. Consider the market for chicken. An increase in the price of beef will a. decrease the demand for chicken, creating a lower price and a smaller amount of chicken purchased in the market. b. decrease the supply of chicken, creating a higher price a and a smaller amount of chicken purchased in the market. c. increase the demand for chicken, creating a higher price and a greater amount of chicken purchased in the market. d. increase the supply of chicken, creating a lower price and a greater amount of chicken purchased in the market.C. An increase in the price of beef will cause an increase in the demand for chicken because beef and chicken are substitutes. 61
  62. 62. 4. An increase in consumer income increases the demand for oranges. As a result of the adjustment to a new equilibrium, there is a (an) a. leftward shift of the supply curve. b. downward movement along the supply curve. c. rightward shift of the supple curve. d. upward movement along the supply curve. D. As the demand curve shifts to the right along the upward sloping supply curve, there is a movement along the supply curve as illustrated on the next page. 62
  63. 63. P The Effects of Shift in Demand on Market Equilibrium$1200 S$900 Shortage$600$300 D2 D1 4 8 12 16 Q 63
  64. 64. 5. An increase in the wage paid to grape pickers will cause the a. demand curve for grapes to shift to the right, resulting in higher prices for grapes. b. demand curve for grapes to shift to the left, resulting in lower prices for grapes. c. supply curve for grapes to shift to the left, resulting in lower prices for grapes. d. supply curve for grapes to shift to the left, resulting in higher prices for grapes. D. An increase in costs is one factor that will cause the supply curve to shift to the left as production becomes more expensive as illustrated on the next page. 64
  65. 65. P The Effects of Shift in Supply on Market Equilibrium$800 S2$600 S1 Shortage$400$200 D 2 4 6 8 Q 65
  66. 66. 6. If the federal government wants to raise the price of cheese, it will a. take cheese from government storage and sell it. b. encourage farmers to research ways to produce more cheese. c. subsidize purchases of farm equipment. d. encourage farmers to produce less cheese.D. As the supply curve for cheese shifts to the left and moves along a downward sloping demand curve, equilibrium price will increase as illustrated on the next page. 66
  67. 67. P The Effects of Shift in Supply on Market Equilibrium$800 S2$600 S1 Shortage$400$200 D 2 4 6 8 Q 67
  68. 68. 7. Which of the following is least likely to result from rent controls set below the equilibrium price for rental housing? a. Shortages and black markets. b. Deterioration of existing rental housing. c. The supply of rental housing will increase rapidly. d. People will demand more apartments than are available.C. The supply curve will shift to the left, not to the right, as suppliers produce fewer rental units due to the lower price and lower profits. 68
  69. 69. 8. Suppose the equilibrium price set by supply and demand is lower than the price ceiling set by the government. The result will be a. a shortage. b. that quantity demanded is equal to quantity supplied. c. a surplus. d. a black market.B. The purpose of price ceilings is to set a maximum price by law. If it is set lower than the equilibrium price, it will have no effect on the equilibrium price as illustrated on the next page. 69
  70. 70. P Rent Control Results in a Shortage of Rental Units$800 S$600$400 Price ceiling Shortage$200 D 2 4 6 8 Q 70
  71. 71. 9. A good that provides external benefits to society has a. too few resources devoted to production. b. too many resources devoted to its production. c. the optimal resources devoted to its production. d. not provided profits to producers of the good. A. An external benefit is an unintentional byproduct of the market. 71
  72. 72. 10. Pollution from cars is an example of a (an) a. harmful opportunity cost. b. negative externality. c. production dislocation. d. none of the above.B. A negative externality imposes costs on third parties when drivers discharge pollution into the air, they erode the quality of life of others. 72
  73. 73. 11. Which of the following is the best example of a public good? a. Pencils. b. Education. c. Defense. d. Trucks.C. None of the other answers fit the definition of a public good. A public good is something from which everyone benefits and no one can be excluded. 73
  74. 74. 12. A public good may be defined as any good or service that a. allows users to collectively consume benefits. b. must be distributed equally to all citizens in equal shares. c. is never produced by government. d. answers a and c above. A. Once a public good is provided, for instance a road, everyone collectively benefits from it. 74
  75. 75. Internet ExercisesClick on the picture of the book, choose updates by chapter for the latest internet exercises 75
  76. 76. END 76
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