Markets Unit 6

Equilibrium Market equilibrium-the point where the quantity of a good or service that consumers are willing and able to buy equals the quantity of a good/service that suppliers are willing and able to supply Equilibrium price- the price marked by the equilibrium point; also known as the “market-clearing price” Equilibrium quantity- the quantity marked by the equilibrium point Any change in the demand curve or the supply curve will have an impact on the equilibrium point Turn to page 101 & 106 in your text

Government Intervention Governments in a mixed economy will sometimes intervene in the market in order to influence prices Price controls- Government placed limits on how high or how low prices in the market can go Price floor- a minimum price consumers are required to pay for a good or service. Any price below the floor is illegal The minimum wage is an example of a price floor in the factor market Price Ceiling- a maximum price consumers may be required to pay for a good or service Rent controlled apartments are examples of a good with a price ceiling

Government Intervention Rationing- is the controlled distribution of a limited supply of a good or service Black market- an illegal market in which goods/services are traded at prices and quantities not allowed by law

Market Structures Market structure- the organization of a particular market based mainly on the degree of competition among producers Economists define market structure according to four main characteristics: 1.Number of producers- the more producers the more competition 2.Similarity of products-more similar=more competition 3.Ease of entry- markets that are easier to enter have more competition 4.Control over prices- the less market power any one producer has, the more competitive the market Market power- the ability to influence prices by increasing or decreasing the supply of goods

Perfect Competition Perfect Competition- the most competitive market structure 1.Many producers and consumers 2.Identical products- Commodity- a product that is exactly the same no matter who produces it; oil, grains, cotton, sugar 3.Few restrictions in entering the market 4.Producers have no market power

Barriers to Entry Barriers to entry- these are the obstacles that can restrict access to a market and limit competition – Start-up costs – Control of resources – Technology

Monopolies Monopoly- a market structure that has a single producer of a product of which there is no substitute 1.There is no competition; there is only one producer 2.There are no substitutes 3.High barriers to entry into the market is the main reason there is only one producer 4.Monopolies have substantial market power; they are price setters. Anti-trust laws- Congress enacted anti-trust laws because they viewed certain monopolies to be harmful to the public good

Legal Monopolies Resource Monopolies- exist when one producer owns or controls a key natural resource Government-created monopolies- exists when the government grants a single firm or individual the exclusive right to provide a good or service -Patents and copyrights for intellectual property -Public franchises-national parks and schools -Licenses Natural monopoly- when a single firm can provide a good or service more efficiently and at a lower price than two or more firms can

Oligopoly Oligopoly- a market structure that is operated by a few firms that produce similar or identical products 1.Few producers- airlines, automobiles, soft drinks 2.Similar products-Coke & Pepsi, light bulbs 3.High barriers to break into the market- start-up costs, brand loyalty 4.The few firms in the market have some control over the pricing in the market

Cooperative Pricing Oligopolies can act like monopolies with their pricing – Price leadership- if an oligopoly is dominated by one firm, they will set the price and the other firms will follow their lead; however this could lead to a “price war” – Collusion- occurs when producers get together and make agreements on production levels and pricing – Cartel- an organization of producers established to set production and price levels for a product; OPEC

Monopolistic Competition Monopolistic Competition-is a market structure where a large number of producers provide goods that are similar but varied 1.Many producers- gas stations, hotels, restaurants 2.Product differentiation- products are different but still considered close substitutes 3.Few barriers to entry 4.Some control over prices but not much

Nonprice competition Producers in a monopolistic competition have to engage in nonprice competition with product differentiation and advertising 1.Physical characteristics- design, color, style, material, etc. 2.Service 3.Location 4.Status and image

Market Failures Market failure- markets which are not perfectly competitive result in inefficient markets, this is a failure Externality- a side effect of production or consumption that has consequences for people other than the producer and consumer; “spillover” effects Negative externality- a cost that falls on someone other than the producer or consumer Positive externality- a benefit that falls on someone other than the producer or consumer; including “technology spillover”

Public Goods Public goods- goods and services that are not provided by the market system because of the difficulty getting people who use them to pay for their use -Fire/Rescue, Police, Nat’l Parks, Nat’l Defense Free-rider problem- firms do not provide “public goods” because they have no way to make the people who benefit from the goods pay for them