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Microeconomics Chapters 4-7 Supply and Demand Objectives • Describe and illustrate the concept of demand. • Explain how demand and utility are related. • Explain what causes a change in quantity demanded. • Describe the factors that could cause a change in demand. Microeconomics • The area of economics that deals with behavior and decision making by small units. • Individuals and firms • Help explain how prices are determined and how individual economic decisions are made. • Must understand supply and demand to understand how a market economy works. • Firms and people act in their own best interests • Successful Business understand supply and demand; • What steps to open a bicycle shop? Demand • The desire, ability, and willingness to buy a product. • Demand schedule: shows the quantities demanded at all prices. • Demand curve: graph showing the quantity demanded at each price. • Law of Demand: the quantity demanded decreases as the price increases. – inverse relationship. • Market demand curve: shows the quantities demanded by everyone who is interested in purchasing the product. Marginal Utility • Marginal Utility: The satisfaction a person gets from acquiring one more unit of a product. • Diminishing marginal utility: the satisfaction we get from using additional quantities of the product begins to diminish. – You get the most satisfaction out of the first unit purchased. – Not willing to pay as much for the next unit as we did for the first. – Pizza, cola – When you reach the point where the marginal utility is less than the price, you stop buying. Changes in Quantity demanded • a movement along the demand curve that shows a change in the quantity of the product purchased at each price level. • Income effect: the change in quantity demanded because of a change in price that alters consumers’ real income. – Decrease in price = increase in net income – Increase in price = decrease in net income • Substitution effect: the change in quantity demanded because of the change in the relative price of the product. – Replace a costly item with a less costly item Changes in Demand • Shift in the entire demand curve; right shows an increase in demand; left is a decrease in demand. • Consumer income: as income rises, consumers are able to buy more products at each price. – Increase in income = shift to the right (increase) – Decrease in income = shift to the left (decrease) • Consumer tastes: advertising, news reports, fashion trends, new products, and seasons – Increase in taste = shift to the right (increase in demand) – Decrease in taste = shift to the left (decrease in demand) Change in Demand • Substitutes: can be used in the place of other products; butter/margarine. – Price increase in butter = increase demand for margarine. – Price decrease in butter = decrease demand for margarine. • Complements: related goods used together; hot dogs/buns and computers/software. – Increase in price for computers = decrease demand for software. – Decrease in price for computers = increase demand for software. Change in Demand • Change in Expectations: future expectations; new technology; CDs or weather forecasts impact crops – New technology = decrease in demand for current product. – Expect bad weather = stock up on some foods before they become scarce. • Number of Consumers: number of buyers change demand curve. – Increase number of consumers = increase in demand – Decrease number of consumers = decrease in demand Review • Area of economics that deals with behavior and decision making of small units. Microeconomics • Graph showing the quantity demanded at each and every price at a given time. Demand curve • The desire, ability, and willingness to buy a product. Demand • The extra usefulness or satisfaction a person gets from acquiring or using one more unit of a product. Marginal utility • The decrease in satisfaction or usefulness received from each additional unit of a product. Diminishing marginal utility Review • More will be purchased at low prices than at high ones. The Law of Demand • How the demand curve always slopes. Downward sloping • Illustrated by movement along the demand curve. Change in quantity demanded • Change in quantity demanded due to a change in prices that alters a consumer’s real income. Income effect • A change in the quantity demanded due to a change in the relative price of a product. Substitution effect • Products that can be used in place of other products. Substitutes • Products that tend to be used together. Complements Review • What impact would increasing consumer income have on quantity demanded? Increase in quantity demanded • What does a shift to the right in the demand curve signify? Increase in demand • What does a shift to the left in the demand curve signify? Decrease in demand • Decrease in consumer income. Decrease in demand; shift to the left. • Changing consumer tastes. Increase or decrease in demand • Increase in the price of related products. decrease in demand; shift to the left • Change in the number of consumers. Market demand curve to shift Examples • Increase price of Pepsi. – Demand for Coke? Demand for Coke increases • South Carolina wins college world series. – Demand for USC tickets? Demand for tickets increase • Price of hotdogs decrease Demand for rolls increase – demand for rolls? • New I-phone coming out Demand will decrease for old phones – Demand for current phone? • Wrangler jeans go on sale. Decrease demand for Levis – Demand for Levis? • Increase in price of Papa Johns. – Demand for Pizza Hut? Demand for Pizza Hut increases • 3D big screen TV’s are coming out. – Demand for plasma televisions? Demand for plasma decreases • Hurricane predicted to hit Myrtle Beach? – Demand for gas generators? Demand for generators increases Elasticity of Demand • What effect does change in price have on demand for a product? How do businesses set prices? • Elasticity: measure of responsiveness a product is to price; is demand of product effected by an increase/decrease of price (rubber band). • Elastic - change in price causes change in quantity demanded; luxury goods, fruits or vegetables (buy in summer vs. less in winter). • Inelastic - change in price causes little or no change in quantity demanded; milk, gas, eggs, salt (still going to demand even if price changes) • Unit elastic: percentage change in quantity equals the percent change in price. – 5% drop in price = 5% increase in quantity demanded. • Total Expenditures Test: multiply the price of the product by the quantity demanded. – Used to test for elasticity – Elastic = price goes down, total expenditures goes up – Inelastic = total expenditures decrease when price decrease. – Unit elastic = no change in expenditures • If you raise prices for elastic goods, your revenue will decrease • Decrease prices to increase revenues (elastic only) Determinants of Demand Elasticity • Can the purchase be delayed? – Inelastic if product is needed or urgent (insulin, tobacco, gasoline) - you have to have it! • Are adequate substitutes available? – Elastic if consumers can switch back and forth between products; take advantage of best price (beef or chicken) • Does the purchase use a large portion of income? – If yes, then usually product is elastic – If no, then usually product is inelastic • Graph the demand schedule for crude oil. • Is the demand for crude oil elastic or inelastic? Why? • At what price ranges is demand more elastic? Why? Price per barrel Quantity Demanded $5 72 $10 67 $15 62 $20 58 $25 56 $30 54 $35 52 $40 49 $45 48 $50 48 $55 47 $60 47 • Mindy is trying to estimate the elasticity of demand for a product she wants to sell at a craft fair. She has been told that she can expect to sell 10 items if she charges $10, six items if she charges $20, and 18 items at $5. – Make a demand schedule to show the quantities demanded at each price. – Create a demand curve and graph the results. – At which price would the total expenditures be the greatest for the product? – At which price would the expenditures be the smallest. – Based on this information, what price should Mindy charge? 1. According to this demand curve, how many movie videos will be demanded at a price of $10? 2. According to this demand curve, if the price of movie videos increases from $14 to $16, what is the the quantity demanded? 1. What is being shown in the graph? 2. Which of the following would cause this to occur? an increase in the price of a complement? decrease in the price of a substitute ? increase in population? decrease in income? Demand Activity • Create an example (graph and explain) for each of the following changes in demand: – Increase in price of a complement – Decrease in price of a complement – Increase in price of a substitute – Decrease in price of a substitute – Increase in income – Decrease in income – Increase in consumers – Decrease in consumers – Change in expectations SUPPLY • Objectives: – Understand the difference between the supply schedule and the supply curve. – Explain how market supply curves are derived – Specify the reasons for a change in supply. Supply • The amount of a product that would be offered for sale at all possible prices. • Law of Supply – supply increases as prices increase; decrease at lower prices. • supply curve – direct relationship between price and quantity supplied. • Supply and demand determine the final price of the product; what consumers are willing to pay and how much producers are willing to produce. Supply • The market supply curve shows the quantities offered at various prices by all firms that offer the product for sale in a given market. • The quantity supplied is the amount that producers bring to the market at any given price. • A change in quantity supplied is the change in amount offered for sale in response to a change in price. – A change along the supply curve – If the price of oil falls, the producer may offer less for sale, or even leave the market altogether if the price goes too low. – If the price rises, the oil producers may offer more units for sale to take advantage of the better prices. Change in Supply • Cost of Inputs: labor, packaging; if cost drops producers are able to produce more and supply increases. • Productivity: workers are more productive, more is produced and supply increases. • Technology: new technology increases supply; new machines, chemical, or process. • Taxes and Subsides: taxes increase the costs of production; – subsidy – government payment to encourage or protect an economic activity. Change in Supply • Expectations: if producers think prices will increase will withhold some supply. • Government Regulation: new laws, safety features increase the cost of production; restrict supply (shift to the left). • Number of Sellers: more firms enter market = increase in supply; entering and exiting all of the time in capitalism. Elasticity of Supply • The way in which quantity supplied responds to a change in price. – If a small increase in price leads to a large change in supply = elastic. – If the quantity supplied changes very little, supply is inelastic. • If a firm can adjust to the new prices quickly = elastic; adjustments take longer = inelastic. Objectives 1. Explain the theory of production 2. Describe the three stages of production 3. Define four key measures of cost 4. Identify two key measures of revenue 5. Analyze business decisions Theory of Production • Theory of Production deals with the relationship between the factors of production and the output of goods and services. – Short run – producers can only change labor; all others held constant – Long run – producers can change all of their resources; capital and equipment. • Law of Variable Proportions – in the short run, output will change as one input is varied while the others are held constant (illustrated by using a production function). – How many workers should be added? Marginal Product • The EXTRA output of change in total product caused by the addition of one more unit of variable input (labor). Stages of Production • Stage I: increasing returns – Adding worker = increased production; more products being produced – Job specialization • Stage II: diminishing returns – Adding worker = more output, but slower rate – Cannot grow any further • Stage III: negative returns – Adding worker = decrease in output The Law of Variable Proportions number of workers Total product Marginal product 0 0 0 1 7 7 2 20 13 3 38 18 4 62 24 5 90 28 6 110 20 7 129 19 8 138 9 9 144 6 10 148 4 11 145 -3 12 135 -10 Costs • Fixed cost: the cost that business incurs even if output is zero – Overhead: total fixed costs – Salaries for executives, rent, interest payments, property taxes. • Variable costs: change when business rate of operation or output changes. – Labor and raw materials • Total Costs = variable + fixed costs • Marginal Cost: the extra cost incurred when a business produces one additional unit. – The per-unit increase in variable costs (overtime pay) Revenue • Many stores are using the internet because overhead costs are low. – No rent, less inventory • Total revenue: units sold X price of each unit. – 7 units sold at $15 each = $105 total revenue • Marginal revenue: the extra revenue by selling one additional unit of output. – Divide change in total revenue by the marginal product Review • The amount of a product that would be offered for sale at all possible prices that could prevail in the market. Supply • Amount that producers bring to the market at any given price. Quantity supplied • A graph showing the various quantities supplied at each and every price that might prevail in the market. Supply curve • Measure of the way in which quantity supplied responds to a change in price. Supply elasticity • A government payment to an individual, business, or other group to encourage or protect a certain type of economic activity. Subsidy Review • States that in the short run, output will change as one input is varied while the others are held constant. Law of Variable Proportions • Concept that describes the relationship between changes in output to different amounts of a single input while other inputs are held constant. Production function • Unprocessed natural products used in production. Raw materials • The extra output or change in total product caused by the addition of one more unit of variable input. Marginal product • Total output produced by a firm. Total product Review • The quantity supplied varies directly with its price. The Law of Supply • What will cause an increase in Supply? Decrease in cost of inputs, decrease in taxes, increase in productivity • Which type of products are the most inelastic? Non-Luxury items, hard to get out of business • How does the supply curve slope? Upward sloping • How will increased government regulation affect the supply curve? Decrease; shift to the left • 3 stages of production include what? Increasing, diminishing, negative returns The Law of Variable Proportions number of workers Total product Marginal product 0 0 0 1 7 7 2 20 13 3 38 18 4 62 24 5 90 28 6 110 20 7 129 19 8 138 9 9 144 6 10 148 4 11 145 -3 12 135 -10 Total fixed costs Total variable costs Total costs Marginal costs $50 $0 $50 -- 50 90 140 $13 50 180 230 6.92 50 270 320 5.00 50 360 410 3.75 50 450 500 3.21 50 540 590 4.50 50 630 680 4.74 50 720 770 10 50 810 860 15.00 50 900 950 22.50 50 990 1,040 -- 50 1,080 1130 -- Addition of 1st worker increased total product by 7 units; variable costs increased by $90, each of the additional 7 units cost $12.86 ($90/7). Next worker adds 13 more units; variable costs increase by $90 ($90/13=6.92). Total Revenue Marginal Revenue Total Profit $0 -- -$50 105 $15 -35 300 15 70 570 15 250 930 15 520 1,350 15 850 1,650 15 1,060 1,935 15 1,210 2,070 15 1,300 2,160 15 1,300 2,220 15 1,270 2,175 15 1,135 2,025 15 895 Total Revenue is # of units X price; Marginal Revenue divide the change in total revenue by the total product; first worker, total output increases 7 units and $105 of total revenue ($105/7=15). Marginal Analysis • Cost-benefit decision – compares the extra benefits to the extra costs. • Break-even point: the total output or total product the business needs to sell in order to cover its total costs. • The profit-maximizing quantity of output is reached when Marginal Costs and Marginal Revenue are equal. – MC = MR • As long as the marginal cost is less than the marginal revenue, the business will keep hiring workers. • Would hire the 6th worker; extra output would only cost $4.50 to produce, and would generate $15 in revenues. • Would probably hire the 7th and 8th workers. • If it hired the 9th worker, the cost of the additional output would equal the additional revenue earned when the product was sold. • Would not hire 10th worker because that would decrease profits. • When marginal cost is less than marginal revenue, more variable inputs should be hired to expand output. Review • A production cost that does not change as total business output changes. Fixed cost • Decision making that compares the additional costs with the additional benefits of an action. Marginal analysis • Associated with Stage II of production. Diminishing returns • A production cost that changes when output changes. Variable cost • A graphical representation of the theory of production. Production function • The additional output produced when one additional unit of input is added. Marginal product Review • Change in total revenue form the sale of one additional unit of output. Marginal revenue • The gradual wearing out of capital goods.depreciation • The sum of variable and fixed costs. Total costs • When marginal revenue equals marginal cost Profit maximizing • Total output produced by a firm. Total product • Total fixed costs overhead True or False 1. A desire to buy a product is the only requirement needed for demand to exist. False 2. Marginal utility describes the decreasing satisfaction a consumer receives with the purchase of each additional unit. False 3. A demand curve illustrates the quantity demanded at all possible prices at a given time. True 4. A demand schedule is created from a demand curve. False 5. The Law of Demand states that more of a product will be purchased at low prices than at high ones. True True or False 6. Productivity will decrease if workers are unmotivated. True 7. If producers expect lower prices in the future, they may withhold some of the supply. False 8. The theory of production deals with the relationship between the factors of production and the output of goods and services. True 9. The Law of Variable Proportions states that in the short run, output will not change as one production input is varied while the others remain constant. False 10. An increase in output as each new input is added, as in the addition of a worker, describes Stage I of the stages of production. True True or False 11. Fixed cost is the cost that a business incurs even if there are no employees and no production takes place. True 12.The Law of Supply states that suppliers will normally offer less for sale at higher prices and more for sale at lower prices. False 13.The market supply curve shows the quantities offered at various prices by all firms that offer the product for sale in a given market. True 14. An increase in the cost of inputs can cause the supply curve to shift to the left. True 15. The supply curve is likely to be elastic for products that can be made quickly without huge amounts of capital and skilled labor. True True or False 16. The introduction of technology usually has no effect on supply. False 17. Marginal cost is the change in total revenue when one more unit of output is sold. False 18. The four important measures of cost are: total True cost, fixed cost, variable cost, and marginal cost. 19. The profit-maximizing quantity of output occurs when marginal cost is exactly equal to total revenue. False 20. Marginal analysis compares the additional benefits of an action to its additional costs. True Prices • Objectives: – Explain how prices act as signals – Describe the advantages of using prices as a way to allocate economic products. – Understand the difficulty of allocating scarce goods and services without using prices. • Price – the monetary value of a product as established by supply and demand. – helps make economic decisions; communicates information and provides incentives to buyers and sellers. • Low prices are signals for producers to produce less and for buyers to buy more. Advantages of Prices • Prices are neutral; don’t favor business or consumers; competition between buyers and sellers; Determined by Supply and Demand. – Without prices the economy would not run as smoothly; favored by economists • Flexible – adjust according to supply and demand; can accommodate to change. • No cost of administration – competitive markets find their own prices without interference. Allocations without prices • Without prices how are scarce resources allocated? • Rationing: government decides • Problems: – Fairness – High costs – Diminishing incentives Market Equilibrium • Buyers and sellers have to compromise; neither can get exactly what they want. • The quantity of goods supplied is equal to the quantity demanded. • If we produce 11 units at $25, but only 1 unit is demanded = surplus of 10 units. • If we produce 3 units at $10 and 10 units are demanded = shortage of -7. • Over time, a compromise or equilibrium is reached; no shortage or surplus Changes in Supply/Demand • Increase in supply (shift to the right) = decrease in equilibrium price. • Decrease in supply (left) = increase in equilibrium price. • Increase in demand (right) = increase in equilibrium price. • Decrease in demand (left) = decrease in equilibrium price. • Increase in supply and demand = no change in price. • Increase in supply and decrease in demand = lower price • Decrease in supply and increase in demand = increase price Supply/Demand • Markets are not perfectly competitive; as sellers compete to meet consumer demands, they are forced to lower the prices of their goods. • Competition among buyers helps prevent prices from falling too far. • Is there a situation in which you would pay a higher price? Price Floors/Ceilings • Setting prices at “socially desirable levels”; prices are not determined through supply and demand. • Price ceilings – maximum legal price that can be charged for a product; favor consumers. – Creates shortages because producers will not produce at lower prices. – Rent controls – less apartments available • Price floors – the lowest legal price that can be paid for a good or service. – Creates surplus because producers produce at the higher prices. – Minimum wages – a surplus of 4 million workers. Review • The monetary value of a product as established by supply and demand. Price • Allows the market economy to Price flexibility accommodate change. • System under which an agency allocated products. Rationing • A partial refund of the original price of the product. Rebate • A set of assumptions that can be used to help analyze behavior and predict outcomes. Economic model • A ticket or receipt that entitles the holder to obtain a certain amount of a product. Ration coupon • What are the advantages of using prices to allocate limited resources? Neutral, flexible, consumers to make decisions • What are the characteristics of rationing? Unfair, decreases incentives, high costs • What do high prices signal? Producers to produce more; buyers to buy less = surplus • What do low prices signal? Producers to produce less; buyers to buy more = shortage • Why do economist think of prices as a “system?” They help buyers and sellers allocate resources between markets. • A situation in which prices are relatively stable and the quantity supplied is equal to the quantity demanded. Market equilibrium • A situation in which the quantity supplied is greater than the quantity demanded at a given price. surplus • The price at which neither a surplus or shortage of a product exists. Equilibrium price • A situation in which the quantity supplied is less than the quantity demanded at a given price. shortage • What happens to price if there is a shortage? Price increases • What happens to price if there is a surplus? Price decreases • A maximum legal price that can be charged for a product. Price ceiling • The lowest legal price that can be paid to most workers. Price floor • Floor price for farm products. Target price • Carries neither a penalty nor further obligations to repay if not paid back. Nonrecourse loan • A check sent to producers that makes up the difference between the actual market price and the target price. Deficiency payment • Rent control is an example of what? Price ceiling • What do price ceilings create? shortage Review • Explain when a surplus occurs. The quantity supplied is greater than the quantity demanded • Give an example of price floor. Federal minimum wage • Explain how prices effectively perform the allocation function. Competitive markets find own prices, easy to understand, don’t favor consumer or producer • Describe how prices enable a market economy to adjust to unexpected events. Adjust consumption and production Review • Explain the characteristics of allocation of resources without using prices. Unfair, lack of incentive, high costs • What will occur if there is a sudden increase in demand? Temporary shortage will occur and price will increase • What is a high price a signal for? Producers to supply more and consumers to buy less • A monetary value of a product. Price • maximum legal price that can be charged for a product price ceiling Review How do the quantity supplied and quantity demanded change at the new equilibrium price? Both quantity supplied and quantity demanded increase. Review • prices are relatively stable, and quantity supplied is equal to quantity demanded Market equilibrium • quantity demanded is greater than quantity supplied Shortage • quantity supplied is greater than quantity demanded at a given price Surplus • price that produces neither a surplus nor a shortage Equilibrium price Review • What is the theory of competitive pricing? is a set of ideal conditions and outcomes • What are deficiency payments? makes up the difference between the actual market price and the target price. • Give an example of who these payments are designed to assist. Farmers • system under which the government or another agency decides everyone's fair share of a product. Rationing • partial refund of the original price of a product. Rebate • loan that has neither a penalty nor an obligation to repay if not paid back Nonrecourse loan Market Structures Perfect Competition Monopolistic competition Oligopoly Monopoly Market Structures • Laissez-faire: the government should not interfere with the economy. • To determine type of market: – How many buyers and sellers are there? – How large are they? – Does either have any influence over price? – How much competition exists between firms? – What kind of product is involved? – Is it easy or difficult for new firms to enter the market? Perfect Competition • Many businesses • No single buyer or seller has any control over price. • Produce identical products • Each buyer and seller acts independently • Buyers and sellers are well-informed • Easy to exit and enter the market • Price is set by supply and demand • A price higher than equilibrium price has no demand. • VERY RARE Monopolistic competition • Everything is the same as in perfect competition except the products are slightly different. • Use advertisement and promotions to differentiate products from competition. • Can influence price slightly, but still very competitive. • More common than perfect competition • Examples??? Oligopoly • • • • • • Few producers dominate the industry. More influence or control over price. Some product differentiation. Some advertisement. Entry to the market is difficult. Businesses follow each other; one has sale or special promotion others have to follow. • Collusion/profit-fixing – formal agreements to set prices; no competition. Monopoly • • • • Only one seller Extensive control over price No product differentiation; Little or no advertising Entry to the market is almost impossible; government regulation for some monopolies. • Rare in the United States; favor competition. • Types: – Natural Monopolies: can provide services cheaper than several could – Geographic monopolies: no other producers in that area – Technological monopolies: control the manufacturing process; they are the only ones that can produce the product or service Characteristics of Market Structures Market Structure Number of Firms in Industry Influence over Price Entry into Market Perfect Competition Many 2._____ 3. _____ 4._____ Many 5. _____ Easy Oligopoly 6._____ 7. _____ Difficult 8._____ One 9._____ 10._____ Type of Market Product Differentiation Advertising Example Perfect Competition 11._____ None Farming products Monopolistic Competition 12. _____ 13. _____ 14. _____ Oligopoly Fair amount 15. _____ 16. _____ Pure Monopoly 17.______ None 18. _____ Free-Enterprise system – Adequate competition must exist in all markets. – Buyers and sellers are well-informed – Resources can move from one industry to another. – Prices must reasonably reflect the costs of production. Market Failure • Inadequate competition: – Inefficient resource allocation: resources not used efficiently (bonuses, salaries, luxury items) – Higher prices and reduced output: artificial shortages that cause higher prices than other market structures. – Economic and political power: powerful businesses can influence politics. – Less competition in supply and demand. • Inadequate information: – Some information is easy to find, but other information is more difficult to obtain causing market failure • Resources immobility: – Land, labor, capital, and entrepreneurs do not move to new markets; factory shuts down and stay in town. Externalities: • An unintended side effect that benefits or harms a third party not involved. • Negative: harm, cost, or incontinence suffered by a third party because of actions by others; living next to an airport • Positive: benefit received by someone who had nothing to do with the activity; airport expansion creates jobs, new restaurant. • The costs and benefits are not reflected in the market prices that buyers and sellers pay for the original product. – The price that travelers pay for air travel does not reflect the costs or benefits that the airport expansion generates. Public good • Products that are collectively consumed by everyone; used by all people: – highways, flood control, national defense, fire and police. • The Market will not naturally provide these goods. – Private markets cannot efficiently produce them and will produce other things; no profit. – Cannot deny one person the benefits of national defense while supplying it to others. – Can’t provide for one person and not another – Provided by the government rather than by private markets. Role of Government • Antitrust: provide fair competition • End price discrimination • Regulate money supply, stock market, food and drugs, trade, labor laws, and job discrimination. • Protects the environment, consumer safety, oversees the airline industry. • Limiting externalities: uses tax money to pay for programs and services to improve the quality of life for Americans and protect citizens. Government Regulation • Pollution tax = increases costs of production; increase in price of products. – Tax passed on to the consumer – $1 pollution tax – Causes decrease in supply and a higher equilibrium price – Internalizing an externality – forces the polluting firm and its customers to pay for the cost of pollution. Federal Regulatory Agencies Agency Function 1. Regulates television, radio, telegraph, and telephone; grants licenses, creates and enforces rules of behavior for broadcasting. Federal Communications Commission 2. Regulates the workplace environment; makes sure that businesses provide workers with safe and healthful working conditions.Occupational Safety and Health Administration 3. Regulates the nuclear power industry; licenses and oversees the design, construction, and operation of nuclear power plants. Nuclear Regulatory Commission 4. Responsible for working to reduce discrimination based on religion, gender, race, national origin, or age. Equal Employment Opportunity Commission 5. Regulates product warranties, unfair methods of competition in interstate commerce, Federal Trade Commission and fraud in advertising. 6. Develops and enforces environmental standards for air, water, and toxic waste. Environmental Protection Agency 7. Regulates purity and safety of food, drugs, and cosmetics. Food and Drug Administration 8. Regulates the sale of stocks, bonds, and other investments. Securities and Exchange Commission Truth in advertising laws are one way the government tries to improve the quality of information in the economy. True or False 1. Economists often use an academic model to False help analyze behavior and predict outcomes. 2. Market equilibrium is the situation in which the quantity of output supplied is equal to the True quantity demanded. 3. The amount of a price change is affected by the elasticity of both the supply and demand curves. True 4. If the price of an item is too high in a competitive market, a shortage appears until the price goes down. False 5. Perfect competition is not necessary for the True theory of competitive pricing to be practical. True or False 6. Market situations lacking one or more of the characteristics of perfect competition are called True imperfect competition. 7. Perfect competition requires a market structure True with freedom for firms to enter or leave the market. 8. Oligopoly is a market structure with one very False large firm. 9. The monopolist does not use an equilibrium True price to determine prices. 10. A private agency usually approves prices for water and electric utilities. False True or False 11. The U.S. government intervenes in the True economy to reduce the costs of imperfect competition. 12. The Clayton Antitrust Act was the first False significant law against monopolies in the United States. 13. A condition of perfect competition is False characterized by product differentiation. 14. The monopolistic competitor operates in a True market with many well-informed buyers and sellers. 15. Market failure can occur when resources do True not move freely from one industry to another. 16. An example of a public good is a home False computer. 17. The Sherman Antitrust Act prohibits False monopolistic competition. 18. The United States government uses taxes to True reduce the effects of negative externalities. Short Answer: 19. List the characteristics of Perfect competition. Identical products, easy to enter/exit market, many sellers, no control over price 20. Define: technological monopoly Control the method, process, or other scientific advance (patent). 21. What is the result of a decrease in competition within an industry? One or a few firms having an increase of economic and political power Market Demand and Supply Schedules Price Quantity Demanded Quantity Supplied Surplus/ Shortage $20 0 20 20 18 2 16 14 16 4 10 6 14 7 7 0 12 11 5 ? 10 13 0 –13 At what price does market equilibrium occur? $14 – quantity demanded = quantity supplied (no surplus or shortage Suppose that demand for gold stands at D1. Then the opening of a new gold mine shifts the supply curve from S1 to S2. How does this shift affect price? Price decreases from $400 to $280 What is the equilibrium price on this graph? Explain what that means. $14 – Quantity demanded = quantity supplied (no surplus or shortage