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Unit 2- CH 4-6
Markets
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In a market system, the interaction between buyers and sellers
determines the prices of most goods as well as what quantity of a
good will be produced.
o Why does the black market exist?
o How does technology affect the interaction between supply
and demand?
Should a firm produce a few more or a few less units of output?
Should a consumer buy a bit more of this and a bit less of that?
Are the additional revenues generated by hiring another worker
equal to or greater than the additional cost?
Should the government increase taxes to hire a few more teachers
so class sizes can be lowered by three to five students?
KEY TERMS TO REMEMBER
Anti-trust Laws – laws that encourage competition in the marketplace
Barriers to entry – any factor that makes it difficult for a new firm to enter a market
Black market – a market in which goods are sold illegally
Cartel – a formal organization of producers that agree to coordinate prices and production
Complements – two goods that are bought and used together
Demand – the desire to own something and the ability to pay for it – the consumer is “willing and
able”
 Quantity Demanded – the amount a consumer is willing and able to consume at a
certain price
 Excess demand – when quantity demanded is more than quantity supplied
Deregulation – the removal of some government controls over a market
Disequilibrium – any price or quantity not at equilibrium
Economy of scale – factors that cause a producer’s average cost per unit to fall as output rises
Elastic – describes demand that is very sensitive to a change in price
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Elasticity of Demand – a measure of how consumers react to a change in price
Elasticity of Supply – a measure of the quantity supplied reacts to a change in price
Externality/Spillover cost – costs of production that affect people who have no control over how
much of a good is produced
 Positive – benefits enjoyed by someone who does not produce or pay to consume a
product
 Negative – costs paid by someone who does not produce or pay to consume a product
Unit 2- CH 4-6
Equilibrium – the point at which quantity demanded and quantity supplied are equal
Income Effect – the change in consumption resulting from a change in real income
Inelastic – describes demand that is not very sensitive to a change in price
Inferior Good – a good that consumers demand less of when their incomes increase
Law of Demand – consumers buy more of a good when its price decreases and less when its
price increases
Law of Supply – tendency of suppliers to offer more of a good at a higher price
Marginal Product of Labor – the change in output from hiring one addition unit of labor
 Diminishing marginal returns – a level of production in which the marginal product of
labor decreases as the number of workers increases
Merger – combination of two or more companies into a single firm
Monopolistic Competition – a market structure in which many companies sell products that are
similar but not identical
Monopoly – a market dominated by a single seller
Normal good – a good that consumers demand more of when their incomes increase
Oligopoly – a market structure in which a few large firms dominate a market
Perfect Competition – a market structure in which a large number of firms all produce the same
product
Price ceiling – a maximum price that can be legally charged
Price floor – a minimum price that can be legally charged
Rationing – a system of allocating scarce good and services using criteria other than price
Subsidy – a government payment that supports a business or market
Substitution Effect – when consumers react to an increase in a good’s price by consuming less
of that good and more of other goods
Supply – the amount of goods available
 Quantity Supplied – the amount a supplier is willing and able to supply at a certain price
 Excess supply – when quantity supplied is more than quantity demanded
Trust – like a cartel, an illegal grouping of companies that discourages competition
Unit 2- CH 4-6
DEMAND CURVE
Factors that cause shifts in the Demand Curve
The demand curve is a visual representation of the quantity demanded at any given price. We
can see shifts in that curve to the left (a decrease in demand) or the right (an increase in demand)
based of things other than changes in the price.
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Income
Consumer Expectations
Population
Consumer tastes and advertising
Unit 2- CH 4-6
SUPPLY CURVE
Factors that cause shifts in the Supply Curve
The supply curve is a visual representation of the quantity supplied at any given price. We can
see shifts in that curve to the left (a decrease in supply) or the right (an increase in supply) based
of things other than changes in the price.
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Changes in the cost of the factors of production
Government subsidies
Changes in taxes
Changes in government regulations
Future expectation of prices
The number of suppliers
Price Ceilings – will always create a shortage of supply at that price
Price Floors – creates a surplus
Unit 2- CH 4-6
ELASTICITY
Factors that affect Elasticity of Demand
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Availability of substitutes
Relative importance
Necessity v luxury
Change over time
Factors that affect Elasticity of Supply
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Time
Unit 2- CH 4-6
Unit 2- CH 4-6
Unit 2- CH 4-6
Costs of Production
In Unit 1, we identified that prices are set as a result of several factors: cost of raw materials, cost
of labor, cost of overhead, profit margin, consumer demand. Here is a closer look at marginal
returns.
Fill in the table as the activity progresses.
Unit 2- CH 4-6
KEY POINTS TO REMEMBER
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Consumers buy less as the price goes up and more when the price goes down.
Suppliers produce less as the price goes down and more when the price goes up.
Some goods and services are more important to us than others and cause us to react to
price changes.
Producers base their production decisions on marginal cost and marginal revenue
figures.
In an uncontrolled market, the price of a good and quantity sold will settle at a point
where the quantity supplied equals the quantity demanded.
When the government sets a maximum or minimum price, the result is often an
imbalance between supply and demand.
Questions to Master
1. Use the market demand schedule below to draw a demand curve for miniature golf.
Cost to Play a Game
$1.50
$2.00
$3.00
$4.00
Games Played per Month
350
250
140
80
2. How does the graph above represent the Law of Demand?_________________________
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3. In order to be part of the “demand” pool, a consumer must be both _________ and _____?
4. What are the factors that will cause a shift in the demand curve?
a.
b.
c.
d.
e.
5. What is the difference between supply and quantity supplied? ______________________
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Unit 2- CH 4-6
6. What are three factors that can cause a change in supply?
a.
b.
c.
7. Assume that a $1 per pound tax has been placed on fish. What effect will this have on
the supply curve for fish? _____________________________________________________
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8. How does rent control work? _________________________________________________
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9. The graph below shows supply and demand curves in the notebook market. Use what you
have learned to identify the following elements of the graph: price floor, supply curve,
equilibrium point, disequilibrium point, demand curve, and price ceiling.
10. Describe how deregulation affected either the airline or telephone industries.
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Unit 2- CH 4-6
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