Transcript Objectives: 1. Explain the role of the price system 2. Describe the benefits and identify the limitations of the price system 3.

Objectives:
1. Explain the role of the price system
2. Describe the benefits and identify the
limitations of the price system
3. Explain the term market equilibrium
4. Identify how the price system handles
product surpluses and shortages
5. Describe how shifts in demand and supply
affect market equilibrium
6. Analyze why governments set prices, price
floors, and price ceilings and engage in
rationing
Adam Smith
12.1: Students understand common
economic terms and concepts and
economic reasoning
12.2: Students analyze the elements of
America’s market economy in a global
setting
12.3: Students analyze the influence of the
federal government on the American
economy
What is the role of the price system?
The price system guides producers and
consumers to balance the forces of supply and
demand by reaching compromises on production
levels.
Benefits of the price system
The price system provides information,
incentives, choice, efficiency, and flexibility
General Washington
used the price system
to keep track of the
price of water to run
his mill and the price
of burlap sacks to put
cornmeal into. That
knowledge helped him
set profitable prices
for his cornmeal.
Benefits of the price system
The price system provides information,
incentives, choice, efficiency, and flexibility
There is a
surplus of
shoes—
prices are
down. I’m a
happy girl. I
have
incentive to
go
shopping!
I ‘d like to buy
some USB
drive memory
sticks but
there is a
shortage and
prices are sky
high. There is
little incentive
to buy.
Benefits of the price system
The price system provides information,
incentives, choice, efficiency, and flexibility
There are literally
thousands of pairs of
shoes in my size at the
mall. What a choice I
have! Because of
consumers like me,
manufacturers produce
incredible numbers of
shoes. I’m such a
happy girl!
Benefits of the price system
The price system provides information,
incentives, choice, efficiency, and flexibility
It also
encourages
efficiency
by quickly
delivering
information
to
producers
and
consumers.
The price
system helps
manufacturers
efficiently use
resources and
tells us what
consumers
want to buy.
Benefits of the price system
The price system provides information,
incentives, choice, efficiency, and flexibility (one
of the price system’s greatest strengths)
Limitations of the price system (market failures)
Externalities—the price system may not take into
account all of the costs and benefits of production
Negative externality exists when someone who
does not make or consume a certain product
nonetheless bears part of the cost of its
production
Limitations of the price system (market failures)
Externalities—the price system may not take into
account all of the costs and benefits of production
A positive externality exists when someone who
does not sell or buy a certain product nonetheless
benefits from its production
Limitations of the price system (market failures)
Public goods—any goods or services that are
consumed by all members of a group, even
though not all members pay for or want them
Limitations of the price system (market failures)
Instability—prices can swing quickly between
extremes based on severe weather, natural
disasters, worker protests, etc.
What is market equilibrium?
A situation that occurs when the quantity supplied
and the quantity demanded for a product are
equal at the same price. At this equilibrium point,
the needs of both producers and consumers are
satisfied, and the forces of supply and demand
are in balance.
What is market equilibrium?
Price per
pair of
shoes
Quantity
Demanded
Quantity
Supplied
$15
180,000
0
$30
150,000
30,000
$45
120,000
60,000
$60
90,000
90,000
$75
60,000
120,000
$90
30,000
150,000
$105
0
180,000
Price per Pair of Tennis Shoes
Equilibrium Price
Demand and
Supply Schedule
$105
S-1
$ 90
$ 75
Equilibrium
$ 60
$ 45
$ 30
D-1
$ 15
0
30
60
90
120 150 180
Quantity demanded (in thousands)
What is market equilibrium?
Equilibrium Price
Demand and
Supply Schedule
Quantity
Demanded
Quantity
Supplied
Price per
Price per
pair of
shoes
Quantity demanded
When Surplus Exists
When the quantity supplied exceeds the quantity
demanded at the prices offered;
The surplus tells producers that they are charging
too much for their item—they can lower the price
and still make a profit. The lower price increases
the quantity demanded and decreases the
quantity supplied, eliminating the surplus and
steering the market toward equilibrium.
When Shortage Exists
When the quantity demanded exceeds the
quantity supplied at the price offered;
The shortage tells producers that they are
charging too little for items and they decide to
raise the price. The higher price decreases the
quantity demanded and increases the quantity
supplied, eliminating the shortage and steering
the market toward equilibrium
When Shortage Exists
National Gasoline
Shortage 1973-1974
Price per Pair of Tennis Shoes
Surplus & Shortage
$105
A
Surplus
B
$ 90
S-1
$ 75
E
$ 60
$ 45
D-1
$ 30
C
Shortage
C
$ 15
0
30
60
90
120 150 180
Quantity demanded (in thousands)
Shifts in Equilibrium
Changes in consumer tastes and preferences,
Market size, Income, Prices of related goods
Consumer expectations
Equilibrium, Demand, and Supply Shifts
Shift in Demand
Shift in Supply
105
$105
S-1
$90
S-1
$90
$75
$75
E-2
D-2
E-1
$60
S-2
E-1
$60
$45
$45
$30
$30
E-2
D-1
$15
$15
0
0
30
60
90
120 150 180
Quantity demanded (in thousands)
D-1
30
60
90
120 150 180
Quantity demanded (in thousands)
Increase in Demand
Decrease in Demand
Why do
Price
ceilings
governments
and floors
sometimes set prices?
I’ll answer
that one. I’m
Price
ceilings—set
a
U. S. Secretary
of a
maximum
price for
Agriculture, Tom Vilsack.
particular
good
(rent
If my staff and I believe a
controls). Price
commodity’s
price floors
will, for
(more
common)—a
some reason,
swing too
government
regulation
dramatically, we
may set
to protect
that prices
establishes
a
producers
minimum
leveland
for prices
consumers.
(crop prices).
Price ceilings and floors
Rationing
Unfair
Expensive
Creates
black
markets
Black market gasoline in Iraq
Water rationing in California. Was it fair?
Northern California
Southern California
Objectives:
1. Define perfect competition
2. Define monopolistic competition
3. Explain how sellers differentiate their
products under monopolistic competition
4. Describe the structure of an oligopoly
5. Define a monopoly
6. Describe the factors that affect price in
oligopolies and monopolies
7. Describe the history of antitrust legislation in
U. S. history
Adam Smith
12.1: Students understand common
economic terms and concepts and
economic reasoning
12.2: Students analyze the elements of
America’s market economy in a global
setting
12.3: Students analyze the influence of the
federal government on the American
economy
Characteristics
Perfect
Competition
Monopolistic
Competition
Oligopoly
Pure
Monopoly
Number of firms
in each industry
Many
Many
Few (3-4)
One
Market
Concentration
Low
Low
High
Absolute
Type of
Product
Similar or
identical
Similar or
identical
Similar or
differentiated
Unique (no
substitutes)
Availability of
Information
Much
(Product
advertising)
Much
(Product
advertising)
Much
(Product
advertising)
Some
(Product and
Institutional Ad)
Entry into
Industry
Very Easy
Fairly Easy
Difficult
Prohibitive
Control over
Prices
None
Little
Some
Complete
Example
Industries
Agriculture
Long-distance
telephone
service
•Automobiles
•Breakfast
cereals
Electric Power
Perfect Competition
An ideal market structure in which buyers, or
consumers, and sellers, or producers, each
compete directly and fully under the laws of
supply and demand. This means that no one
buyer or seller controls demand, supply or prices
and nothing prevents competition among both
buyers and sellers
Conditions for Perfect Competition
Many buyers and sellers act independently
Sellers offer identical products
Buyers are well informed about products
Sellers can enter or exit the market easily
Perfect Competition
An ideal market structure in which buyers, or
consumers, and sellers, or producers, each
compete directly and fully under the laws of
supply and demand. This means that no one
buyer or seller controls demand, supply or prices
and nothing prevents competition among both
buyers and sellers
Monopolistic Competition vs. Perfect Competition
Differs in one key respect—sellers offer different,
rather than identical, products—each firm seeks
to have monopoly-like power by selling a unique
product
Monopolistic Competition vs. Perfect Competition
Similarities: First, both buyers and sellers in
monopolistic competition operate under the laws
of supply and demand
Both systems also feature many buyers and
sellers acting independently
Monopolistic Competition vs. Perfect Competition
Product differentiation—pointing out differences
and using brand names
Non-price competition—most common is
advertising
Monopolistic Competition
Businesses involved in monopolistic competition
try to create profits by setting its product apart
from the competition and convincing buyers to
base their decision on non-price factors, a seller
can raise the price of its product above the
competitive level and make more profit. The
seller does this by increasing demand for its
product, thereby shifting market price upward.
Shift in Demand and Equilibrium Price
$70
S-1
Price per Pair of Jeans
$60
B
$50
D-2
$40
A
$30
$20
$10
D-1
0
20
40
60
80
100 120
Quantity demanded (in thousands)
Oligopoly
A market structure in which a few large sellers
control most of the production of a good or
service
Three conditions that must be present for an
oligopoly to exist:
Only a few large sellers
Sellers offer identical or similar products
Other sellers cannot enter the market easily
Kellogg’s, General Mills and Post: 80% of sales
Price war
Sellers aggressively undercut each other’s prices
in an attempt to gain market share. Price wars
can initially benefit consumers by lowering prices.
If this level of competition lasts a long time, a
seller may lose so much money that it is forced
out of business. When a price war ends, prices
tend to rise again as oligopolistic sellers return to
price leadership and non-price competition. If
one or more sellers have gone out of business,
prices may rise even higher than before the price
war because of reduced competition.
Price war
Example:
John D. Rockefeller
Standard Oil
Company of Ohio
Sold oil at a price lower than
cost of producing it to drive
competitors out of business
After gaining market control,
increased prices far above
original level
Cartels
A group of sellers openly organize a system of
price setting and market sharing. Cartels are
illegal in the U.S. because they fix prices.
What conditions for a monopoly to exist?
There is a single seller
No close substitute goods are available
Other sellers cannot enter the market easily
Natural Monopolies
A single large seller produces a good or service
most efficiently.
Economies of scale: the seller’s large scale, or
size, allows it to use its human, capital, and other
resources more efficiently and economically than
if those resources were divided among several
smaller producers.
Geographic Monopolies
Technological
Government
Monopolies
Monopolies
Limits on Seller’s Control Over Prices
Consumercompetition
Government
Potential
Demand
Regulation
Antitrust Legislation
Interstate Commerce Act of 1887
Attempt to regulate the
railroads
Clear: only Federal
Government could
regulate railroads
Banned discrimination in rates between long
and short hauls
RRs required to publish rate schedules and
file them with the government
All interstate rail rates had to be reasonable
and just
Created the Interstate Commerce Commission
Antitrust Legislation
Sherman Anti-Trust Act of 1890
Proposed by John Sherman,
Senator from Ohio
Outlawed trusts as
interfering with free trade
Almost impossible to enforce—
Law was too vague and
Supreme Court did not support
Clayton Antitrust Act
1914
Strengthened Sherman
Antitrust Act of 1896
Declared certain
business practices
illegal:
Corporations could no longer
acquire stock of another
corporation if so doing would
create a monopoly
Clayton Antitrust Act
Officers of companies
who violated the law
could be prosecuted
Labor unions and farm
organizations could
exist and would no
longer be subject to antitrust laws
Strikes, peaceful picketing,
boycotts, & collecting strike
benefits became legal.
Federal Trade Act of 1914
Set up a 5-member
“watchdog” agency
called the Federal Trade
Commission (FTC) with
the power to investigate
possible violations of
laws regulating business and to
put a stop to unfair business
competition and business
practices.
Robinson-Patman Act of 1936
AKA Antiprice Discrimination Act) protects
businesses by prohibiting
wholesalers from
charging small retailers
higher prices than they
charge large retailers and by prohibiting
large retailers from setting artificially low
prices.
Celler-Kefauver Act of 1950
Amended the Clayton Act
to prohibit corporate
acquisitions when they
substantially decrease
competition
Antitrust Procedures and Penalties Act of
1975
Increased penalties for violating antitrust
laws
Parens Patriae Act of 1976
Gives states the right to sue companies
on behalf of citizens harmed by the
company’s antitrust violations; requires
large companies to notify the government
of planned mergers; strengthened the
federal government’s power to investigate
antitrust violations.
Is Microsoft a monopoly?
If Microsoft is a monopoly, what remedy
would you propose?
What contributions has Bill Gates made
in his role as entrepreneur?