45 Key Concepts What can cause a shift in a demand curve? What can cause a shift in a supply curve?What are the two types of price controls?What is a price ceiling?What is a price floor?Why do we have price ceilings and floors?What is market failure?
46 Key Concepts cont. What happens when competition is lacking? What is an externality?What is a negative externality?What is a positive externality?What is a public good?What is another example of market failure?
48 Price ceilings and price floors are maximum and minimum prices enacted by law, rather than allowing the forces of supply and demand to determine prices. A price ceiling is a maximum price mandated by government, and a price floor is a minimum legal price.
49 P Q S D $800 $600 $400 $200 2 4 6 8 Rent ceiling Shortage If a price ceiling is set below the equilibrium price, a shortage will persistPS$800$600Rent ceilingShortage$400D$200Q2468
50 If a price floor is set above the equilibrium price, a surplus will persist WmMinimum wageUnemploymentWeDQDQEQS
51 Market failure means that the market mechanism does not achieve desirable results. Sources of market failure include lack of competition, externalities, public goods, and income inequality. Although controversial, government intervention is a possible way to correct market failure.
52 An externality is a cost or benefit of a good imposed on people who are not buyers or sellers of that good. Pollution is an example of an external cost, which means too many resources are used to produce the product responsible for the pollution. Two basic approaches to solve this market failure are taxes (like in pollution taxes) and regulation (like in vaccinations).
53 S2 S1 D P2 P1 Q2 Q1 Includes external costs of pollution External Cost of PollutionIncludes external costs of pollutionS2S1P2P1DExcludes external costs of pollutionQ2Q1
54 S D2 D1 P2 P1 Q1 Q2 Includes Vaccination benefits External Benefits of AIDS VaccinationsIncludes Vaccination benefitsSP2P1D2Excludes Vaccination benefitsD1Q1Q2
55 Public goods are goods that are consumed by everyone regardless of whether they pay or not. National defense, air traffic control, and other public goods can benefit many individuals simultaneously and are provided by the government.
57 1. Suppose prices for new homes have risen, yet sales of new homes have also risen. We can conclude thata. the demand for new homes has risen.b. the law of demand has been violated.c. new firms have entered the construction industry.d. construction firms must be facing higher costs.A. The demand for new homes has risen causing the price to increase and the quantity of new homes to increase as illustrated on the next page.
58 An increase in demand for new homes P2P1D2D1Q1Q2
59 2. Which of the following statements if true of a market? a. An increase in demand, with no change in supply, will increase the equilibrium price and quantity.b. An increase in supply, with no change in demand, will decrease the equilibrium price and the equilibrium quantity.c. A decrease in supply, with no change in demand, will decrease the equilibrium price and increase the equilibrium quantity.d. all of the above are true.A. See previous graph.
60 3. Consider the market for chicken 3. Consider the market for chicken. An increase in the price of beef willa. decrease the demand for chicken, creating a lower price and a smaller amount of chicken purchased in the market.b. decrease the supply of chicken, creating a higher price a and a smaller amount of chicken purchased in the market.c. increase the demand for chicken, creating a higher price and a greater amount of chicken purchased in the market.C. An increase in the price of beef will cause an increase in the demand for chicken because beef and chicken are substitutes.
61 4. An increase in consumer income increases the demand for oranges 4. An increase in consumer income increases the demand for oranges. As a result of the adjustment to a new equilibrium, there is a (an)a. leftward shift of the supply curve.b. downward movement along the supply curve.c. rightward shift of the supple curve.d. upward movement along the supply curve.D. As the demand curve shifts to the right along the upward sloping supply curve, there is a movement along the supply curve as illustrated on the next page.
62 The Effects of Shift in Demand on Market Equilibrium PThe Effects of Shift in Demand on Market Equilibrium$1200S$900Shortage$600D2$300D1Q481216
63 5. An increase in the wage paid to grape pickers will cause the a. demand curve for grapes to shift to the right, resulting in higher prices for grapes.b. demand curve for grapes to shift to the left, resulting in lower prices for grapes..c. supply curve for grapes to shift to the left, resulting in lower prices for grapes.d. supply curve for grapes to shift to the left, resulting in higher prices for grapes.D. An increase in costs is one factor that will cause the supply curve to shift to the left as production becomes more expensive as illustrated on the next page.
64 The Effects of Shift in Supply on Market Equilibrium $800S2S1$600Shortage$400$200DQ2468
65 6. If the federal government wants to raise the price of cheese, it will a. take cheese from government storage and sell it.b. encourage farmers to research ways to produce more cheese.c. subsidize purchases of farm equipment.d. encourage farmers to produce less cheese.D. As the supply curve for cheese shifts to the left and moves along a downward sloping demand curve, equilibrium price will increase as illustrated on the next page.
66 The Effects of Shift in Supply on Market Equilibrium $800S2S1$600Shortage$400$200DQ2468
67 7. Which of the following is least likely to result from rent controls set below the equilibrium price for rental housing?a. Shortages and black markets.b. Deterioration of existing rental housing.c. The supply of rental housing will increase rapidly.d. People will demand more apartments than are available.C. The supply curve will shift to the left, not to the right, as suppliers produce fewer rental units due to the lower price and lower profits.
68 8. Suppose the equilibrium price set by supply and demand is lower than the price ceiling set by the government. The result will bea. a shortage.b. that quantity demanded is equal to quantity supplied.c. a surplus.d. a black market.B. The purpose of price ceilings is to set a maximum price by law. If it is set lower than the equilibrium price, it will have no effect on the equilibrium price as illustrated on the next page.
69 Rent Control Results in a Shortage of Rental Units PRent Control Results in a Shortage of Rental UnitsS$800$600Price ceilingShortage$400D$200Q2468
70 9. A good that provides external benefits to society has a. too few resources devoted to production.b. too many resources devoted to its production.c. the optimal resources devoted to its production.d. not provided profits to producers of the good.A. An external benefit is an unintentional byproduct of the market.
71 10. Pollution from cars is an example of a (an) a. harmful opportunity cost.b. negative externality.c. production dislocation.d. none of the above.B. A negative externality imposes costs on third parties when drivers discharge pollution into the air, they erode the quality of life of others.
72 11. Which of the following is the best example of a public good? a. Pencils.b. Education.c. Defense.d. Trucks.C. None of the other answers fit the definition of a public good. A public good is something from which everyone benefits and no one can be excluded.
73 12. A public good may be defined as any good or service that a. allows users to collectively consume benefits.b. must be distributed equally to all citizens in equal shares.c. is never produced by government.d. answers a and c above.A. Once a public good is provided, for instance a road, everyone collectively benefits from it.