1. Chapter 4
Markets in Action
• Key Concepts
• Summary
• Practice Quiz
• Internet Exercises
©2000 South-Western College Publishing
1

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. What can cause a shift
in a Demand Curve?
1. Number of buyers in the market
2. Tastes and preferences
3. Income
4. Expectations of consumers
5. Prices of related goods
* Return to previous slide while in slide show
3

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. The Effects of Shift in Demand on
Market Equilibrium
$40
S
$30
Surplus
$20
$10
D1
D2
10 20 30 40
5

6. Increase in
Quantity
Supplied
Increase in
Equilibrium
Price
Increase in
Demand
6

7. Decrease in
Quantity
Supplied
Decrease in
Equilibrium
Price
Decrease in
Demand
7

8. What can cause a shift
in a Supply Curve?
1. Number of sellers in the market
2. Technology
3. Resource prices
4. Taxes and subsidies
5. Expectations of producers
8

9. The Effects of Shift in Supply on
Market Equilibrium
$4
S1 S2
$3 Surplus
$2
$1
D
20 40 60 80
9

10. The Effects of Shift in Supply on
Market Equilibrium
$800
S2
$600 S1
Shortage
$400
$200
D
2 4 6 8
10

11. Increase in
Quantity
Demanded
Decrease in
Equilibrium
Price
Increase in
Supply
11

12. Decrease in
Quantity
Demanded
Increase in
Equilibrium
Price
Decrease in
Supply
12

13. 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and Supply be repealed?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
13

14. What are the two types
of price controls?
Price ceilings
Price floors
14

15. What is a Price Ceiling?
A legally established
maximum price a
seller can charge
15

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. Shortage
Quantity
Demanded
exceeds the
quantity supplied
Rent
Ceiling
17

18. What is the purpose of
Price Ceilings on Rent?
So needy people will
pay lower rent than
the equilibrium rent
18

19. Why may Rent Controls
be counterproductive?
• Shortages
• Illegal markets
• Less maintenance
• Discrimination
19

20. What are other examples
of Price Ceilings?
Wage and price controls
Usury laws
20

21. What is a Price Floor?
A legally established
minimum price a
seller can be paid
21

22. A Minimum Wage Results
in a Surplus of Labor
Wm Minimum wage S
Unemployment
We
D
QD QE QS
22

23. Unemployment
Minimum
wage
23

24. What are examples of
Price Floors?
Minimum wage law
Agricultural price supports
24

25. Why do we have Price
Ceilings and Floors?
Because of failures in
the free market
25

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. Who was Adam Smith?
The father of modern
economics who wrote
The Wealth of Nations,
published in 1776
27

28. What did Adam Smith
say about Competition?
There must be competition for
markets to function properly
28

29. What happens when
Competition is lacking?
Market failure results
29

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. What is an example of
another Market Failure?
Externalities
31

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. What is a
Negative Externality?
An externality that is
detrimental to third parties
33

34. What is an example of a
Negative Externality?
Pollution
34

35. External Cost of Pollution
Includes external costs of pollution
P2 S2 S1
P1
D
Excludes external costs of pollution
Q2 Q1
35

36. What is a
Positive Externality?
An externality that is
beneficial to third parties
36

37. What is an example of a
Positive Externality?
Vaccinations
37

38. External Benefits of AIDS Vaccinations
Includes Vaccination benefits
S
P2
P1
D2
$10 Excludes Vaccination benefits
D1
Q1 Q2
38

39. Inefficient
equilibrium
External
costs
39

40. Inefficient
equilibrium
External
benefits
40

41. What is another example
of a Positive Externality?
Public Goods
41

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. What are examples of
Public Goods?
• National defense
• Public education
• Roads
43

44. What is another example
of Market Failure?
Income inequality
44

45. Key Concepts
45

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. 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. Summary
48

49. Price ceilings and price floors
are maximum and minimum prices
enacted by law, rather than allowing
the forces of supply and demand to
determine prices. A price ceiling is a
maximum price mandated by
government, and a price floor is a
minimum legal price.
49

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. If a price floor is set above the
equilibrium price, a surplus will persist
Wm Minimum wage S
Unemployment
We
D
QD QE QS
51

52. Market failure means that the
market mechanism does not achieve
desirable results. Sources of market
failure include lack of competition,
externalities, public goods, and income
inequality. Although controversial,
government intervention is a possible
way to correct market failure.
52

53. An externality is a cost or benefit
of a good imposed on people who are
not buyers or sellers of that good.
Pollution is an example of an external
cost, which means too many resources
are used to produce the product
responsible for the pollution. Two basic
approaches to solve this market failure
are taxes (like in pollution taxes) and
regulation (like in vaccinations).
53

54. External Cost of Pollution
Includes external costs of pollution
P2 S2 S1
P1
D
Excludes external costs of pollution
Q2 Q1
54

55. External Benefits of AIDS Vaccinations
Includes Vaccination benefits
S
P2
P1
D2
Excludes Vaccination benefits
D1
Q1 Q2
55

56. Public goods are goods that are
consumed by everyone regardless of
whether they pay or not. National
defense, air traffic control, and other
public goods can benefit many
individuals simultaneously and are
provided by the government.
56

57. Chapter 4 Quiz
©2000 South-Western College Publishing
57

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. An increase in demand for new homes
S
P2
P1
D2
D1
Q1 Q2
59

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Internet Exercises
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choose updates by chapter for
the latest internet exercises
75

76. END
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