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Economics
Unit Four
PRICES AND MARKETS
PRICES
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?
Information
Incentives
Efficiency
Choice
Flexibility
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?
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 shortages
and surpluses?
A surplus 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 shortage 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.
How do shifts in demand and supply affect market
equilibrium?
The equilibrium shifts to a new intersection on the
curve, depending on the nature of the shift.
D
$
D
$
S
$
S
$
Why do governments sometimes set prices?
Governments become involved in the market to
remedy the limitations of the price system.
What do governments try to do?
Through price ceilings governments regulate a
maximum price for a particular good. They try to
make it more affordable.
This tends to result in shortages since producers are
less likely to supply at the artificial price.
Through price floors governments regulate a
minimum price for a particular good. They try to
make it more profitable
This tends to result in surpluses since producers 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 costs,
and encourages a black market for the good.
MARKET STRUCTURES
What is perfect competition?
Perfect competition is an ideal market structure in
which buyers and sellers each compete directly and
fully under the laws of supply and demand.
many buyers and sellers acting independently
sellers
offer
identical
products
perfect competition
buyers
know the
product
well
sellers can enter or exit the market easily
What is monopolistic competition?
A market in which producers offer a similar, but not
identical, good or service.
Producers differentiate their product from
other similar products
Consumers base buying decisions on non-price
competition
Producers increase profit by increasing
demand for their product
How is an oligopoly structured?
An oligopoly is a market structure in which a few
large sellers control most of the production of a good
or a service
C
O
N
D
I
T
I
O
N
S
Few large sellers
Identical or
similar
products
Difficult
market entry
P
R
O
P
E
R
T
I
E
S
Non-price
competition
Interdependent
pricing
Collusion
Cartel
What is a monopoly?
A market structure of single seller controlling all
production of a good or service
single
seller
monopoly
no close
substitutes
available
other sellers cannot enter the market easily
What types of monopolies exist?
A natural monopoly is a market in which competition
is inconvenient and impractical, and thus efficiency is
best achieved by a single seller
Example: public and private utilities
A geographic monopoly is a market whose geographic
area is so limited that a single seller can control an
item’s manufacture, sale, distribution, or price.
Example: rural, isolated services
A technological monopoly is a market that is
dominated by a single producer because of new
technology it has developed.
Example: goods and services protected by
patents and copyrights
A government monopoly is a market in which
government is the sole producer or seller of a
product.
Example: public transportation structures,
general welfare services
What factors affect price in oligopolies and
monopolies?
Consumer demand
Potential competition
Government regulation
What is meant by the term “Era of Big Business”?
In the 1800s huge monopolies (called trusts)
eliminated small companies throughout the major US
industries. The government did little to intervene in
the market system, allowing the natural forces to
work. This represents laissez-faire economics.
What has the government done to monitor and
regulate big business?
Interstate Commerce Act (1887) created the
Interstate Commerce Commission to oversee railroad
rates; grew to regulate railroads, motor vehicles and
other freight carriers.
The Sherman Anti-Trust Act (1890) prohibited any
agreements, contracts, or conspiracies that would
restrain interstate trade or allow monopolies to form.
The Clayton Antitrust Act (1914) clarified and
strengthened the Sherman Act by prohibiting price
discrimination, local price cutting, mergers that
reduce competition, and exclusive sales contracts.
The Federal Trade Commission Act (1914) created the
Federal Trade Commission to investigate charges of
unfair methods of competition and commerce.
The Parens Patriae Act (1976) gave states the right to
sue companies accused of antitrust activity; required
large companies to notify the government of planned
mergers.