Objectives: Objectives: 1. 1. Explain the role of the price Explain the role of the price system system 2. 2. Describe the benefits and Describe the benefits and identify the limitations of the identify the limitations of the price system price system 3. 3. Explain the term market Explain the term market equilibrium equilibrium 4. 4. Identify how the price system Identify how the price system handles product surpluses and handles product surpluses and shortages shortages 5. 5. Describe how shifts in demand and Describe how shifts in demand and supply affect market equilibrium supply affect market equilibrium
Transcript
Objectives:Objectives:1.1.Explain the role of the price systemExplain the role of the price system2.2.Describe the benefits and identify the Describe the benefits and identify the limitations of the price systemlimitations of the price system3.3.Explain the term market equilibriumExplain the term market equilibrium4.4.Identify how the price system handles Identify how the price system handles product surpluses and shortagesproduct surpluses and shortages5.5.Describe how shifts in demand and Describe how shifts in demand and supply affect market equilibriumsupply affect market equilibrium6.6.Analyze why governments set prices, Analyze why governments set prices, price floors, and price ceilings and price floors, and price ceilings and engage in rationingengage in rationing
12.112.1: Students understand common : Students understand common economic terms and concepts and economic terms and concepts and economic reasoning economic reasoning
Adam Smith Adam Smith
12.212.2: Students analyze the elements : Students analyze the elements of of America’s market economy in a America’s market economy in a global global setting setting
12.312.3: Students analyze the influence : Students analyze the influence of theof the federal government on the American federal government on the American economy economy
What is the role of the price system?What is the role of the price system?
The price system guides producers and The price system guides producers and consumers to balance the forces of supply consumers to balance the forces of supply and demand by reaching compromises on and demand by reaching compromises on production levels.production levels.
Benefits of the price systemBenefits of the price system
The price system provides information, The price system provides information, incentives, choice, efficiency, and flexibilityincentives, choice, efficiency, and flexibilityThe price system provides information, The price system provides information, incentives, choice, efficiency, and flexibilityincentives, choice, efficiency, and flexibilityGeneral Washington General Washington
used the price used the price system to keep system to keep
track of the price of track of the price of water to run his mill water to run his mill
and the price of and the price of burlap sacks to put burlap sacks to put cornmeal into. That cornmeal into. That knowledge helped knowledge helped him set profitable him set profitable
prices for his prices for his cornmeal.cornmeal.
Benefits of the price systemBenefits of the price system
The price system provides The price system provides information,information, incentivesincentives, choice, efficiency, and flexibility, choice, efficiency, and flexibility
I ‘d like to I ‘d like to buy some buy some USB drive USB drive memory memory
sticks but sticks but there is a there is a
shortage and shortage and pricesprices are are sky sky highhigh. .
There is There is little little incentive incentive to to
buy. buy.
There is a There is a surplus of surplus of shoes—shoes—
pricesprices are are downdown. I’m . I’m a happy a happy
girl. I have girl. I have incentiveincentive
to go to go shopping!shopping!
Benefits of the price systemBenefits of the price system
The price system provides The price system provides information,information, incentives, incentives, choice,choice, efficiency, and flexibility efficiency, and flexibility
There are literally There are literally thousands of pairs of thousands of pairs of shoes in my size at shoes in my size at the mall. What a the mall. What a
choicechoice I have! I have! Because of Because of
consumers like me, consumers like me, manufacturers manufacturers
produce incredible produce incredible numbers of shoes. numbers of shoes.
I’m such a happy girl!I’m such a happy girl!
Benefits of the price systemBenefits of the price system
The price system provides The price system provides information, information, incentives, choice, incentives, choice, efficiencyefficiency, and flexibility, and flexibility
The price The price system helps system helps manufacturemanufacturers rs efficientefficiently ly
use use resources resources
and tells us and tells us what what
consumers consumers want to buy. want to buy.
It also It also encourageencourages s efficiencyefficiency by quickly by quickly delivering delivering informatioinformatio
n to n to producers producers
and and consumersconsumers
..
Benefits of the price systemBenefits of the price system
The price system provides The price system provides information, information, incentives, choice, efficiency, and incentives, choice, efficiency, and flexibility flexibility (one of the price system’s greatest (one of the price system’s greatest strengths)strengths)
Limitations of the price system (market Limitations of the price system (market failures)failures)Externalities—the price system may not Externalities—the price system may not take into account all of the costs and take into account all of the costs and benefits of productionbenefits of productionNegative externality exists when someone Negative externality exists when someone who does not make or consume a certain who does not make or consume a certain product nonetheless bears part of the cost product nonetheless bears part of the cost of its production of its production
Limitations of the price system (market Limitations of the price system (market failures)failures)Externalities—the price system may not Externalities—the price system may not take into account all of the costs and take into account all of the costs and benefits of productionbenefits of productionA positive externality exists when someone A positive externality exists when someone who does not sell or buy a certain product who does not sell or buy a certain product nonetheless benefits from its production nonetheless benefits from its production
Limitations of the price system (market Limitations of the price system (market failures)failures)Public goods—any goods or services that Public goods—any goods or services that are consumed by all members of a group, are consumed by all members of a group, even though not all members pay for or even though not all members pay for or want them want them
Limitations of the price system (market Limitations of the price system (market failures)failures)Instability—prices can swing quickly Instability—prices can swing quickly between extremes based on severe between extremes based on severe weather, natural disasters, worker protests, weather, natural disasters, worker protests, etc.etc.
What is market equilibrium?What is market equilibrium?
A situation that occurs when the quantity A situation that occurs when the quantity supplied and the quantity demanded for a supplied and the quantity demanded for a product are equal at the same price. At product are equal at the same price. At this equilibrium point, the needs of both this equilibrium point, the needs of both producers and consumers are satisfied, and producers and consumers are satisfied, and the forces of supply and demand are in the forces of supply and demand are in balance.balance.
What is market equilibrium?What is market equilibrium?
Price per pair of shoes
Quantity Demand
ed
Quantity
Supplied
$15$15 180,000180,000 00
$30$30 150,000150,000 30,00030,000
$45$45 120,000120,000 60,00060,000
$60$60 90,00090,000 90,00090,000
$75$75 60,00060,000 120,00120,0000
$90$90 30,00030,000 150,00150,0000
$105$105 00 180,00180,0000
Demand and Demand and Supply Schedule Supply Schedule
Equilibrium PriceEquilibrium Price
Pri
ce p
er
Pair
of
Ten
nis
Pri
ce p
er
Pair
of
Ten
nis
S
hoes
Sh
oes
Quantity demanded (in thousands)Quantity demanded (in thousands)
$105
$ 90
$ 75
$ 60
$ 45
$ 30
$ 15 0
30 60 90 120 150 180 30 60 90 120 150 180
S-1S-1
D-1D-1
Equilibrium Equilibrium
What is market equilibrium?What is market equilibrium?
Price per pair of shoes
Quantity Demand
ed
Quantity
Supplied
Demand and Demand and Supply Schedule Supply Schedule
Equilibrium PriceEquilibrium Price
Pri
ce p
er
Pri
ce p
er
Quantity demanded Quantity demanded
When Surplus Exists When Surplus Exists
When the quantity supplied exceeds the When the quantity supplied exceeds the quantity demanded at the prices offered;quantity demanded at the prices offered;The surplus tells producers that they are The surplus tells producers that they are charging too much for their item—they can charging too much for their item—they can lower the price and still make a profit. The lower the price and still make a profit. The lower price increases the quantity lower price increases the quantity demanded and decreases the quantity demanded and decreases the quantity supplied, eliminating the surplus and supplied, eliminating the surplus and steering the market toward equilibrium.steering the market toward equilibrium.
When Shortage Exists When Shortage Exists
When the quantity demanded exceeds the When the quantity demanded exceeds the quantity supplied at the price offered;quantity supplied at the price offered;The shortage tells producers that they are The shortage tells producers that they are charging too little for items and they charging too little for items and they decide to raise the price. The higher price decide to raise the price. The higher price decreases the quantity demanded and decreases the quantity demanded and increases the quantity supplied, eliminating increases the quantity supplied, eliminating the shortage and steering the market the shortage and steering the market toward equilibriumtoward equilibrium
When Shortage Exists When Shortage Exists
National Gasoline National Gasoline Shortage 1973-Shortage 1973-19741974
Surplus & Shortage Surplus & Shortage
Pri
ce p
er
Pair
of
Ten
nis
Pri
ce p
er
Pair
of
Ten
nis
S
hoes
Sh
oes
Quantity demanded (in thousands)Quantity demanded (in thousands)
$105
$ 90
$ 75
$ 60
$ 45
$ 30
$ 15 0
30 60 90 120 150 180 30 60 90 120 150 180
BB
CC
EE
AA
CC
Surplus Surplus
Shortage Shortage
S-1S-1
D-1D-1
Shifts in Equilibrium Shifts in Equilibrium
Changes in consumer tastes and Changes in consumer tastes and preferences,preferences,Market size, Income, Prices of related Market size, Income, Prices of related goodsgoodsConsumer expectationsConsumer expectations
Equilibrium, Demand, and Supply Shifts Equilibrium, Demand, and Supply Shifts
Quantity demanded (in thousands)Quantity demanded (in thousands)
$105
$90
$75
$60
$45
$30
$15 0
30 60 90 120 150 180 30 60 90 120 150 180
E-1E-1
S-1S-1
D-1D-1
Quantity demanded (in thousands)Quantity demanded (in thousands)
$105
$90
$75
$60
$45
$30
$15 0
30 60 90 120 150 180 30 60 90 120 150 180
E-1E-1
S-1S-1
D-1D-1
E-2E-2
D-2D-2
E-2E-2
S-2S-2
Shift in Demand Shift in Supply Shift in Demand Shift in Supply
Decrease in DemandDecrease in DemandIncrease in DemandIncrease in Demand
Why do governments sometimes set Why do governments sometimes set prices?prices?
I’ll answer that one. I’ll answer that one. I’m U. S. Secretary of I’m U. S. Secretary of
Agriculture, Tom Agriculture, Tom Vilsack. If my staff and Vilsack. If my staff and
I believe a I believe a commodity’s commodity’s priceprice will, will, for some reason, for some reason, swing swing
too dramaticallytoo dramatically, we , we may may set prices toset prices to
protect producers and protect producers and consumersconsumers..
Price ceilings and floors Price ceilings and floors
Price ceilings—set a Price ceilings—set a maximum price for a maximum price for a particular good particular good (rent (rent controls)controls). Price floors . Price floors (more common)(more common)—a —a government government regulation that regulation that establishes a establishes a minimum level for minimum level for prices prices (crop prices)(crop prices). .
Price ceilings and floors Price ceilings and floors
RationingRationing
UnfairUnfairExpensiveExpensiveCreates Creates black black markets markets
Black market gasoline in Black market gasoline in IraqIraq
Water rationing in California. Was it Water rationing in California. Was it fair?fair?
Northern California Southern Northern California Southern CaliforniaCalifornia
Objectives:Objectives:1.1.Define perfect competitionDefine perfect competition2.2.Define monopolistic competitionDefine monopolistic competition3.3.Explain how sellers differentiate their Explain how sellers differentiate their products under monopolistic competitionproducts under monopolistic competition4.4.Describe the structure of an oligopolyDescribe the structure of an oligopoly5.5.Define a monopolyDefine a monopoly6.6.Describe the factors that affect price in Describe the factors that affect price in oligopolies and monopoliesoligopolies and monopolies7.7.Describe the history of antitrust Describe the history of antitrust legislation in U. S. historylegislation in U. S. history
12.112.1: Students understand common : Students understand common economic terms and concepts and economic terms and concepts and economic reasoning economic reasoning
Adam Smith Adam Smith
12.212.2: Students analyze the elements : Students analyze the elements of of America’s market economy in a America’s market economy in a global global setting setting
12.312.3: Students analyze the influence : Students analyze the influence of theof the federal government on the American federal government on the American economy economy
CharacteristCharacteristicsics
PerfectPerfectCompetitionCompetition
MonopolisticMonopolisticCompetitionCompetition
OligopolyOligopoly Pure Pure Monopoly Monopoly
Number of Number of firms in firms in
each each industryindustry
ManyMany ManyMany Few (3-4)Few (3-4) OneOne
Market Market ConcentratiConcentrati
onon
LowLow LowLow HighHigh AbsoluteAbsolute
Type of Type of ProductProduct
Similar or Similar or identicalidentical
Similar or Similar or identicalidentical
Similar or Similar or differentiatedifferentiate
dd
Unique (no Unique (no substitutes)substitutes)
Availability Availability of of
InformationInformation
MuchMuch(Product (Product
advertising)advertising)
MuchMuch(Product (Product
advertising)advertising)
MuchMuch(Product (Product
advertising)advertising)
SomeSome(Product (Product
and and Institutional Institutional
Ad)Ad)
Entry into Entry into IndustryIndustry
Very EasyVery Easy Fairly EasyFairly Easy DifficultDifficult ProhibitiveProhibitive
An ideal market structure in which buyers, An ideal market structure in which buyers, or consumersor consumers, and sellers, , and sellers, or producersor producers, , each compete directly and fully under the each compete directly and fully under the laws of supply and demand. This means laws of supply and demand. This means that no one buyer or seller controls that no one buyer or seller controls demand, supply or prices and nothing demand, supply or prices and nothing prevents competition among both buyers prevents competition among both buyers and sellersand sellers
Conditions for Perfect CompetitionConditions for Perfect CompetitionMany buyers and sellers act Many buyers and sellers act independently independently Sellers offer identical productsSellers offer identical productsBuyers are well informed about products Buyers are well informed about products Sellers can enter or exit the market easily Sellers can enter or exit the market easily
Perfect CompetitionPerfect Competition
An ideal market structure in which buyers, An ideal market structure in which buyers, or consumersor consumers, and sellers, , and sellers, or producersor producers, , each compete directly and fully under the each compete directly and fully under the laws of supply and demand. This means laws of supply and demand. This means that no one buyer or seller controls that no one buyer or seller controls demand, supply or prices and nothing demand, supply or prices and nothing prevents competition among both buyers prevents competition among both buyers and sellersand sellers
Monopolistic Competition vs. Perfect Monopolistic Competition vs. Perfect CompetitionCompetitionDiffers in one key respect—sellers offer Differs in one key respect—sellers offer different, rather than identical, products—different, rather than identical, products—each firm seeks to have monopoly-like each firm seeks to have monopoly-like power by selling a unique productpower by selling a unique product
Monopolistic Competition vs. Perfect Monopolistic Competition vs. Perfect CompetitionCompetitionSimilarities: First, both buyers and sellers in Similarities: First, both buyers and sellers in monopolistic competition operate under monopolistic competition operate under the laws of supply and demandthe laws of supply and demandBoth systems also feature many buyers Both systems also feature many buyers and sellers acting independentlyand sellers acting independently
Monopolistic Competition vs. Perfect Monopolistic Competition vs. Perfect CompetitionCompetitionProduct differentiation—pointing out Product differentiation—pointing out differences and using brand names differences and using brand names
Non-price competition—most common is Non-price competition—most common is advertisingadvertising
Monopolistic CompetitionMonopolistic Competition
Businesses involved in monopolistic Businesses involved in monopolistic competition try to create profits by setting competition try to create profits by setting its product apart from the competition and its product apart from the competition and convincing buyers to base their decision on convincing buyers to base their decision on non-price factors, a seller can raise the non-price factors, a seller can raise the price of its product above the competitive price of its product above the competitive level and make more profit. The seller level and make more profit. The seller does this by increasing demand for its does this by increasing demand for its product, thereby shifting market price product, thereby shifting market price upward.upward.
Quantity demanded (in thousands)Quantity demanded (in thousands)
$70
$60
$50
$40
$30
$20
$10 0
20 40 60 80 100 120 20 40 60 80 100 120
S-1S-1
D-1D-1
D-2D-2
Pri
ce p
er
Pair
of
Jean
sPri
ce p
er
Pair
of
Jean
s
Shift in Demand and Equilibrium Price Shift in Demand and Equilibrium Price
AA
BB
OligopolyOligopoly
A market structure in which a few large A market structure in which a few large sellers control most of the production of a sellers control most of the production of a good or servicegood or service
Three conditions that must be present for Three conditions that must be present for an oligopoly to exist:an oligopoly to exist:Only a few large sellersOnly a few large sellersSellers offer identical or similar products Sellers offer identical or similar products Other sellers cannot enter the market Other sellers cannot enter the market easily easily
Kellogg’s, General Mills and Post: 80% of Kellogg’s, General Mills and Post: 80% of salessales
Price warPrice war
Sellers aggressively undercut each other’s Sellers aggressively undercut each other’s prices in an attempt to gain market share. prices in an attempt to gain market share. Price wars can initially benefit consumers Price wars can initially benefit consumers by lowering prices. If this level of by lowering prices. If this level of competition lasts a long time, a seller may competition lasts a long time, a seller may lose so much money that it is forced out of lose so much money that it is forced out of business. When a price war ends, prices business. When a price war ends, prices tend to rise again as oligopolistic sellers tend to rise again as oligopolistic sellers return to price leadership and non-price return to price leadership and non-price competition. If one or more sellers have competition. If one or more sellers have gone out of business, prices may rise even gone out of business, prices may rise even higher than before the price war because higher than before the price war because of reduced competition.of reduced competition.
Example: Example: John D. RockefellerJohn D. RockefellerStandard Oil Standard Oil Company of OhioCompany of Ohio
Sold oil at a price lower thanSold oil at a price lower than cost of producing it to drive cost of producing it to drive competitors out of businesscompetitors out of businessAfter gaining market control,After gaining market control, increased prices far above increased prices far above original leveloriginal level
Price warPrice war
CartelsCartelsA group of sellers openly organize a system A group of sellers openly organize a system of price setting and market sharing. of price setting and market sharing. Cartels are illegal in the U.S. because they Cartels are illegal in the U.S. because they fix prices.fix prices.
What conditions for a monopoly to exist? What conditions for a monopoly to exist? There is a single sellerThere is a single sellerNo close substitute goods are availableNo close substitute goods are availableOther sellers cannot enter the market Other sellers cannot enter the market easilyeasily
Natural Monopolies Natural Monopolies
A single large seller produces a good or A single large seller produces a good or service most efficiently.service most efficiently.Economies of scale: the seller’s large scale, Economies of scale: the seller’s large scale, or size, allows it to use its human, capital, or size, allows it to use its human, capital, and other resources more efficiently and and other resources more efficiently and economically than if those resources were economically than if those resources were divided among several smaller producers.divided among several smaller producers.
Geographic Monopolies Geographic Monopolies Technological Monopolies Technological Monopolies Government Monopolies Government Monopolies
Limits on Seller’s Control Over Prices Limits on Seller’s Control Over Prices Consumer DemandConsumer DemandGovernment RegulationGovernment RegulationPotential competitionPotential competition
Attempt to regulate the Attempt to regulate the railroadsrailroadsClear: only Federal Clear: only Federal Government could Government could regulate railroadsregulate railroadsBanned discrimination in rates between long Banned discrimination in rates between long and short haulsand short haulsRRs required to publish rate schedules and RRs required to publish rate schedules and file them with the governmentfile them with the governmentAll interstate rail rates had to be reasonable All interstate rail rates had to be reasonable and justand justCreated the Interstate Commerce CommissionCreated the Interstate Commerce Commission
Interstate Commerce Act of 1887 Interstate Commerce Act of 1887 Antitrust LegislationAntitrust Legislation
Sherman Anti-Trust Act of 1890 Sherman Anti-Trust Act of 1890 Proposed by John Sherman,Proposed by John Sherman, Senator from OhioSenator from Ohio
Outlawed trusts as Outlawed trusts as interfering with free interfering with free tradetrade
Almost impossible to enforce—Almost impossible to enforce—Law was too vague andLaw was too vague andSupreme Court did not supportSupreme Court did not support
Antitrust LegislationAntitrust Legislation
Clayton Antitrust Act Clayton Antitrust Act
19141914Strengthened Sherman Strengthened Sherman Antitrust Act of 1896 Antitrust Act of 1896
Declared certain Declared certain business practices business practices illegal:illegal:
Corporations could no longer Corporations could no longer acquire stock of another acquire stock of another corporation if so doing would corporation if so doing would create a monopoly create a monopoly
Clayton Antitrust Act Clayton Antitrust Act
Officers of companies Officers of companies who violated the law who violated the law could be prosecutedcould be prosecuted
Labor unions and farm Labor unions and farm organizations could organizations could exist and would no exist and would no longer be subject to antitrust lawslonger be subject to antitrust laws
Strikes, peaceful picketing, Strikes, peaceful picketing, boycotts, & collecting strike boycotts, & collecting strike benefits became legal.benefits became legal.
Federal Trade Act of 1914Federal Trade Act of 1914
Set up a 5-member Set up a 5-member “ “watchdog” agency watchdog” agency called the Federal Trade called the Federal Trade Commission (FTC) with Commission (FTC) with the power to investigate the power to investigate possible violations of possible violations of laws regulating business and to laws regulating business and to put a stop to unfair business put a stop to unfair business competition and business competition and business practices.practices.
AKA Antiprice Discrimin-AKA Antiprice Discrimin-ation Act) protects ation Act) protects businesses by prohibitingbusinesses by prohibitingwholesalers from wholesalers from charging small retailerscharging small retailershigher prices than they higher prices than they charge large retailers and by prohibiting charge large retailers and by prohibiting large retailers from setting artificially low large retailers from setting artificially low prices.prices.
Robinson-Patman Act of 1936 Robinson-Patman Act of 1936
Amended the Clayton Act Amended the Clayton Act to prohibit corporate to prohibit corporate acquisitions when they acquisitions when they substantially decrease substantially decrease competitioncompetition
Celler-Kefauver Act of 1950Celler-Kefauver Act of 1950
Increased penalties for violating antitrustIncreased penalties for violating antitrustlaws laws
Antitrust Procedures and Penalties Act of Antitrust Procedures and Penalties Act of 1975 1975
Gives states the right to sue Gives states the right to sue companies on behalf of citizens companies on behalf of citizens harmed by the company’s antitrust harmed by the company’s antitrust violations; requires large companies violations; requires large companies to notify the government of planned to notify the government of planned mergers; strengthened the federal mergers; strengthened the federal government’s power to investigate government’s power to investigate antitrust violations.antitrust violations.
Parens Patriae Act of Parens Patriae Act of 19761976
Is Microsoft a monopoly?Is Microsoft a monopoly?If Microsoft is a monopoly, what If Microsoft is a monopoly, what remedy would you propose?remedy would you propose?What contributions has Bill Gates What contributions has Bill Gates made in his role as entrepreneur?made in his role as entrepreneur?
