Macro Economics Chapter 04 Power Point Flashcards
What will I learn in Chapter 4?
•How changes in supply and demand influence the equilibrium price and quantity of goods and services exchanged
What else will I learn in Chapter 4?
•You will study situations in which the market mechanism fails
What causes a change in market equilibrium?
•A change in demand•A change in supply
What can cause a shift in a demand curve? A change in:
•Number of buyers in the market•Tastes and preferences•Income•Expectations of consumers•Prices of related goods
An increase in Demand causes:
Increase in Equilibrium Price then Increase in Quantity Supplied
A decrease in Demand causes:
Decrease in Equilibrium Price then Decrease in Quantity Supplied
What can cause a shift in a supply curve? A change in:
•Technology•Number of sellers in the market•Resource prices•Taxes and subsidies•Expectations of producers
An increase in Supply causes:
Decrease in Equilibrium Price then Increase in Quantity Demanded
A decrease in Supply causes:
Increase in Equilibrium Price then Decrease in Quantity Demanded
Can the laws of demand and supply be repealed?
•In some markets, the objective of politicians is to prevent prices from reaching the equilibrium price
What are the two types of price controls?
1.Price ceilings2.Price floors
What is a price ceiling?
•A legally established maximum price a seller can charge
What is the purpose of price ceilings on rent?
•So needy people will pay lower rent than the equilibrium rent
What is the result of price ceilings on rent?
•A shortage of rental units
A Rent Ceiling will cause:
Quantity Demanded exceeds the quantity supplied then an Shortage.
Why may rent controls be counter productive?
•Shortages•Illegal markets•Less maintenance•Discrimination
What are other examples of price ceilings?
•Wage and price controls•Usury laws
What is a price floor?
•A legally established minimum price a seller can be paid
What are examples of price floors?
•Minimum wage law•Agricultural price supports
What is the result of a price floor on wages paid to labor?
•A surplus of labor
Why do we have price ceilings and floors?
•Because of failures in the free market
What is market failure?
•A situation in which the price system creates a problem for society or fails to achieve society’s goals
Who was Adam Smith?
•The father of modern economics who wrote The Wealth of Nations, published in 1776
What did Adam Smith say about competition?
•There must be competition for markets to function properly
What happens when competition is lacking?
•Market failure results
What is an example of another market failure?
•Externalities
What is an externality?
•A cost or benefit imposed on people other than the consumers and producers of a good or service
What is a negative externality?
•An externality that is detrimental to third parties
What is an example of a negative externality?
•Pollution
External costs cause:
Inefficient equilibrium
What is the conclusion of chapter 4?
•When the supply curve fails to include external costs, the equilibrium price is artificially low, and the equilibrium quantity is artificially high
What is a positive externality?
•An externality that is beneficial to third parties
What is an example of a positive externality?
•Vaccinations
What is the conclusion of positive externality?
•When externalities are present, market failure gives incorrect price and quantity signals, and resources are misallocated
What is the effect of external costs and benefits on resources?
•External costs cause the market to over allocate resources, and external benefits cause the market to under allocate resources
What is a public good?
•A good that, once produced, has two properties:1.users collectively consume benefits2.no one can be excluded
What are examples of public goods?
•National defense•Public education•Roads
What is the conclusion of public goods?
•If public goods are available only in the marketplace, people wait for someone else to pay, and the result is an underproduction or zero production of public goods
What is another example of market failure?
•Income inequality
