ECONOMICS UNIT 5 Surplus Shortage 3 Types of

ECONOMICS UNIT 5 Surplus, Shortage, 3 Types of Competition

HOW PRICES ARE DETERMINED n Surplus: When supply is greater than demand n To get rid of a surplus, stores lower prices (sales) and produce less.

HOW PRICES ARE DETERMINED n SHORTAGE: Demand is greater than supply n Stores respond by raising prices and producing more.

HOW PRICES ARE DETERMINED n Equilibrium Price: Price where demand EQUALS supply Also called “Market Clearing Price” n NO SURPLUS OR SHORTAGE n

SURPLUS/SHORTAGE GRAPH n On board: Calculate the shortage or surplus at each price on the table. Also list the equilibrium price.

SURPLUS OR SHORTAGE? n A very popular singer is coming to town to perform in a concert hall that seats 10, 000 people. The ticket price for the concert is $30 person. There are 30, 000 fans in the area who are willing to pay $80 per ticket to attend the concert. What will happen?

SURPLUS OR SHORTAGE? n A very popular singer is coming to town to perform in a concert hall that seats 10, 000 people. The ticket price for the concert is $30, 000 person. There are 3, 000 fans in the area who are willing to pay $80 per ticket to attend the concert. What will happen?

SHORTAGE OR SURPLUS? n The Ford Motor Company has designed a new car that resembles a Ford model that was popular 40 years ago. Ford plans to produce 100, 000 of the new-old cars each year. Ford will price these cars at $24, 000. There are 200, 000 people per year that want to buy the car. What will happen?

SHORTAGE OR SURPLUS? n The Fish and Wildlife Department in California allows people to dig for razor clams on ocean beaches 3 days a year. There is a small charge ($10) for a license to dig these clams. Millions of people enjoy eating razor clams. During most of the year they buy razor clams in fish markets for $20 to $30 per dozen. What will happen on the days people can dig razor clams themselves?

THE PRICE SYSTEM n Prices serve as signals in the market. n Sometimes the government fixes prices and prevents the price system from transmitting information.

THE PRICE SYSTEM n PRICE CEILING: highest price that can be charged for a good. n Ex: rent control apartments in NYC n Price ceilings result in SHORTAGES if set below market price. n See graph

THE PRICE SYSTEM n PRICE FLOORS: lowest price that can be paid for a good or service n EX. – Minimum Wage: lowest legal wage that can be paid to workers n Price Floors result in a SURPLUS if set above market price.

COMPETITION AND MARKET STRUCTURES n ADAM SMITH n Laissez faire: government should not interfere with trade. n INDUSTRY: producers, the supply side in a market n MARKET STRUCTURE: amount of competition among businesses in the same industry. n Pure competition, monopolistic, oligopoly, monopoly

PURE COMPETITION n 5 characteristics of PURE COMPETITION: 1. No one seller can affect price. 2. All products are the same; no preferred brands 3. Buyer/seller actions determined by competition (price matching) 4. Buyers/sellers are informed on all prices 5. No can stop when you enter or leave the industry.

IMPERFECT COMPETITION n Market structure that is missing one of the pure competition characteristics n 3 Types: Monopolistic n Oligopoly n Monopoly n

MONOPOLISTIC n MONOPOLISTIC COMPETITION: market structure that has everything except for the same products. n Product differentiation: differences between competing products in the same industry (Sprite vs. Coke Zero) n Non-price competition: competition involves advertising of a product’s image or quality.

OLIGOPOLY n OLIGOPOLY: a few very large sellers of a product dominate the market n Ex: Mc. D/BK/Wendy’s n A single producer CAN cause a change in output, prices, sales, etc. n Ex: . 50 cent Whoppers? n Whenever one firm does something, others usually follow n Ex: price fixing

OLIGOPOLY n PRICE WAR: when one business lowers prices, others usually follow. This leads to low prices in the industry n Raising prices in an OG is risky unless you know rivals will follow n Price leadership: when one firm takes lead and makes most price changes; others follow

MONOPOLY n MONOPOLY: only one seller of an economic product with no close substitutes n Natural Monopoly: costs are minimized by having a single firm produce the product n Ex: public utilities, transportation n Geographic monopoly: due to location; no other business in the area offers any competition n Ex: drug store in a small town

MONOPOLY n Technological Monopoly: when a firm or individual discovers new manufacturing technique or invents something new. n PATENT: gov’t issued exclusive right to manufacture, use, or sell any new product; 17 yrs n COPYRIGHT: gives authors/artists exclusive right to publish, sell, or reproduce their work for their lifetime plus 50 years.

MONOPOLY n Monopsony: when there is a single BUYER n ex – US gov’t is only buyer for astronaut services

MARKET FAILURES n #1 INADEQUATE COMPETITION n Mergers and acquisitions have resulted in larger and fewer firms dominating industries n We want COMPETITIVE MARKETS

MARKET FAILURES n #2 INADEQUATE INFORMATION n Buyers and sellers need information about market conditions, prices, etc. for resources to be allocated efficiently

MARKET FAILURES n #3 RESOURCE IMMOBILITY n When resources (C-E-L-L) are immobile or refuse to move, markets do not function as efficiently as they could.

MARKET FAILURES n #4 EXTERNALITIES n EXTERNALITIES are an economic side effect that either benefits or harms a 3 rd party not directly involved in the activity. n Negative externality: Economic side effect that harms a third party. Ex – pollution n Positive externality: side effect of an economic action that benefits a third party. Ex – airport expansion creates more jobs

MARKET FAILURES n #5 PUBLIC GOODS n Products (national defense, fire/police) that are collectively consumed by the population n Public goods can’t be easily denied to people and are not used up when more people take advantage of them. n Government must provide public goods, because they are not profitable.

ROLE OF THE GOVERNMENT n Government has the power to maintain competition n TRUST: legally formed combinations of corporations or companies.

ANTI-TRUST LEGISLATION n Sherman Antitrust Act (1819): protected trade against unlawful restraint and monopoly n Clayton Antitrust Act (1914): outlawed price discrimination: practice of charging customers different prices for the same product.

ANTITRUST LEGISLATION n Federal Trade Commission (1914): established to regulate unfair competition in interstate commerce. n Securities and Exchange Commission (SEC): regulates sale of stocks and brokers who sell them.