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1、,Chapter 4,Markets in action,Key concepts,Understanding changes in market equilibrium Explaining causes of a change in demand Explaining causes of a change in supply Understanding price ceilings and floors Explaining market failure,3,Changes in market equilibrium,Supply and demand analysis helps us
2、to understand many of the events that occur in the real world. Changes in prices and quantities sold in markets primarily occur because of: changes in demand changes in supply.,4,Changes in demand,Recall from chapter 3 that changes in demand occur as a result of changes in: the number of buyers in t
3、he market tastes and preferences levels of disposable income expectations of consumers prices of related goods.,5,6,An increase in demand,If one of these factors causes an increase in demand, the result will be: an increase in prices an increase in quantity supplied.,An increase in demand,7,8,A decr
4、ease in demand,If one of these factors causes a decrease in demand, the result will be: a decrease in prices a decrease in quantity supplied.,A decrease in demand,9,Changes in supply,Recall from chapter 3 that changes in supply occur as a result of changes in: technology number of sellers in the mar
5、ket resource prices taxes and subsidies expectations of producers.,10,11,An increase in supply,If one of these factors causes an increase in supply, the result will be: a decrease in prices an increase in quantity demanded.,An increase in supply,12,13,A decrease in supply,If one of these factors cau
6、ses a decrease in supply, the result will be: an increase in prices a decrease in quantity demanded.,A decrease in supply,14,Can the laws of supply and demand be repealed?,For various reasons, governments implement price controls to restrict market forces. There are two types of price controls: pric
7、e ceilings price floors. Price ceilings and price floors are maximum and minimum prices enacted by law.,15,16,Price ceilings,A price ceiling is a legally established maximum price a seller can charge. It always results in an excess of quantity demanded over quantity supplied. This is called a shorta
8、ge.,Price ceilings (cont.),17,18,Price ceilings (cont.),Price ceilings on rent help needy people by keeping prices lower than the equilibrium. But they may be counterproductive if they cause: shortages illegal markets less maintenance discrimination.,Price floors,A price floor is a legally establish
9、ed minimum price a seller can be paid. It always results in an excess of quantity supplied over quantity demanded. This is called a surplus.,19,Price floors (cont.),20,21,Examples of price floors,Price floor examples are minimum wages and agricultural price supports. These can also have unintended c
10、onsequences: unemployment overproduction and waste of resources.,22,Market failure,The price system may not always operate efficiently, as society fails to achieve some goals. We consider four examples: lack of competition in the market externalities public goods income inequality.,23,Market failure
11、 (cont.),Market failure means that the market mechanism does not achieve desirable results. Although controversial, government intervention is a possible way to correct market failure.,Market failure: lack of competition,Consumer sovereignty is replaced by big business sovereignty. Firms without com
12、petitors tend to restrict supply, which raises prices and profits, and reduces community well-being by wasting resources and retarding innovation.,24,Market failure: lack of competition (cont.),25,Market failure: externalities,An externality is a cost or benefit imposed on third parties (people othe
13、r than the buyers and sellers of the good). It is sometimes called a spill over effect. Externalities can be: positive (beneficial spill overs) negative (harmful spill overs).,26,27,Negative externalities,Those that are detrimental to third parties: A neighbours consumption of loud music may reduce
14、your ability to study. Noise pollution caused by aircraft. Smoke from a factory. Approaches to solving these failures are: taxes (e.g. pollution taxes) regulations (to limit pollution).,Negative externalities,28,Economists prefer a tax-based solution because it is more efficient.,Positive externalit
15、ies,Externalities that are beneficial to third parties, for example: Government expenditure in schooling benefits the whole of society, not just students. Vaccinations provide a direct benefit to the patient and a spill over benefit to other people (less chance of contracting the disease).,29,Positi
16、ve externalities,30,Society encourages positive spillovers,There are government subsidies for attending school and being vaccinated against disease. Regulations push the demand curve for positive spillover type commodities to the right, for example: laws about immunisation of infants laws about atte
17、nding school.,31,Public goods,Goods that, once produced, have two properties: users collectively consume benefits no-one can be excluded. Public goods are goods that are consumed by everyone regardless of whether they pay or not.,32,Public goods (cont.),National defence and air traffic control can b
18、enefit many individuals simultaneously and are provided by the government. Public goods exist as there is very little (or no) financial incentive for firms to produce them.,33,Public goods (cont.),The government usually pays for public goods through its tax revenues. This can encourage free riders w
19、here individuals, although they do not pay through the taxation system, can continue to enjoy the benefits.,34,Income inequality,Even if the market operates efficiently, an unequal distribution of income may result. This may not indicate market failure, but most agree that there should be some effort to reduce inequality (a safety net) to protect those with little economic power (e.g. the old, the sick, the needy).,35,