Pure
Competition
Thousands
Everyone
sells
identical
products
Lowestanyone can
enter the
market
None- Price
is set by
supply and
demand.
They are
“price
takers”
No need.
Everyone is
selling the
EXACT same
thing.
Everyone is
selling
similar
products in
a patterned
variety
Low – Not
very
expensive
or
difficult
to start a
business
Some- their
products are
slightly
different
from
competitors
Widely usedthey try to
differentiate
their product
substantially
Businesses
sell
similar
products in
a patterned
variety:
Coke/Pepsi;
Sprite/
Sierra Mist
High
barriers:
costly and
expensive
to start
Significant
control over
price but
subject to
price
leadership.
You have to
watch
competitor’s
prices!
1 seller
Monopoly is Highest
Total
controls
in a SINGLE Barrierscontrol over
the market product
almost not price
possible
to enter
market
Widely usedthey try to
differentiate
their
products from
their
competitors
Monopolistic Hundreds
Competition
*McDonald’s
has the
monopoly on
the Big Mac,
but faces
competition
with the
hamburger.
Oligopoly
2-4
sellers
*A system of who
Intercontrol
Dependence!
the vast
majority
of the
market.
Monopoly
No TRUE
example,
but these
are close:
Wheat,
corn, oil
Any type
of
commodity
Fast food,
Blue jeans
Coke/Pepsi
Kellogg’s,
Post,
General
Mills,
Quaker
No need- they Power
are the only
companies
seller
Lesson 16:
Key Ideas: In a market economy production decisions and prices are primarily determined
by the Laws of Supply and Demand. The Law of Demand shows that LOW PRICES tend to be
incentives for buyers.
for sellers.
The Law of Supply shows that HIGH PRICES tend to be incentives
The Law of Demand: Ceteris paribus, as price increases, quantity
demanded decreases. As price decreases, quantity demanded
increases. This trend creates the curve shown in the graph to the
left. The downward slope of the demand curve illustrates this
inverse relationship between price and quantity.
When prices change, we move along the demand curve. This is
referred to as a change in quantity demanded.
The Law of Supply: Ceteris paribus, as price increases, quantity supplied
increases. As price decreases, quantity supplied decreases. This behavior
creates the curve shown in the graph to the left. The positive slope of the
supply curve illustrates the direct relationship between price and quantity.
When price changes, we move along the supply curve. This is referred to
as a change in quantity supplied.
**Given a curve, you should be able to differentiate between a supply curve and a demand
curve. You should also be able to read and interpret coordinating price and quantities.
Lesson 17:
Key Ideas: When you graph the supply curve and the demand curve in the same space, the
curves will intersect. This intersection is called EQUILIBRIUM. EQUILIBRIUM occurs when
quantity supplied and quantity demanded are the same. The price at which equilibrium
occurs is called the MARKET CLEARING PRICE.
If the market is not in equilibrium, it is in DISEQUILIBRIUM.
If the price is above equilibrium, the type of disequilibrium created is a
SURPLUS. Quantity supplied will be greater than quantity demanded. This
makes sense since sellers are willing to produce more at higher prices.
If the price is below equilibrium, the type of disequilibrium created is a
SHORTAGE. Quantity demanded will be greater than quantity supplied.
This makes sense since buyers are willing to purchase more at lower prices.
Lesson 18:
Key Ideas: Sometimes, government leaders do not think that prices are “fair” or
equitable. Politicians will step in and try to control prices rather than let
equilibrium be reached. These types of controls are known as price floors and price
ceilings. Note that both types of price controls place markets in disequilibrium.
Price Floor: A minimum price that can legally be charged for a resource,
good, or service. Price floors are set because politicians think the
equilibrium price is too low, so they want to make the price higher. The
classic example of this is a minimum wage. Politicians think it is
unreasonable for someone to work for $5 per hour, so they place a price
floor on wages.
Notice that price floors will create surpluses. In the case of minimum
wage, it creates a surplus of workers.
Price Ceiling: A maximum that can legally be charged for a product.
Politicians will set price ceilings when they feel a market price is unfairly
high. This will artificially lower the price of the product, but it will create a
shortage. Note that historically, politicians have placed price ceilings on
goods and services that are viewed as necessities. This might include
certain foods, gasoline, or more recently, housing as with rent control in
New York City.
** You need to be able to examine a graph and tell if a price is a floor or a ceiling.
You also need to be able to determine if the disequilibrium created is an example of a
shortage or a surplus. Keep in mind, only in economics are floors above ceilings.
Lesson 19:
Key Ideas: Various factors can cause demand for a product to change. When demand
changes, it means that the willingness of an individual to purchase that product has
changed at all prices. That said, it should be clear that PRICE DOESN’T SHIFT THE
CURVE!! (Remember, a change in price simply leads to movement along the demand curve.)
What can change demand? Tastes and preferences, the prices of related goods
(substitutes, complements), income, the number of buyers in the market, and expectations
of future prices.
When demand increases, the curve shifts right. When demand decreases the curve will
shift to the left. Remember IRDL (Increase, Right: Decrease, Left)
Increase in Demand
Decrease in Demand
** You need to be able to read the changes in price and quantity that result when a
demand curve shifts. For example, if demand increases, price and quantity will rise.
demand decreases, price and quantity will fall.
If
Lesson 20:
Key Ideas: Many factors can cause the supply of a product to change. This means that
the willingess and ability of a supplier to produce a product has changed at ALL PRICES.
Since it changes at all price, you should know that PRICE DOESN’T SHIFT THE CURVE!
What will shift the supply curve? Changes in technology, changes in input costs, changes
in the prices of other goods a producer could produce, changes in taxes, subsidies, or
regulations, changes in expectations of future prices, changes in the number of sellers.
When supply increases, the curve shifts to the right.
shifts to the left. IRDL works here too!
When supply decreases, the curve
**
You need
to be able to read what happens to price and quantity when supply changes.
Increase
in Supply
Decrease in Supply (Don’t say shift up!)
For example, when supply increases, price falls and quantity increases. When supply
decreases, price rises and quantity falls.
Lesson 21:
Key Ideas: Elasticity of demand and supply simply measure how responsive people are to a
change in price. For example, we know that if price rises, people tend to buy less of a
product. But how much less? A little less? A lot less? When we ask these questions,
we are asking about the elasticity of demand or supply for a product.
Elasticity of Demand:
Measures how responsive buyers are to a change in price
Elastic Demand- When price changes, buyers change how much they buy by A LOT.
This
is true of things that are not necessities and things that have a lot of
substitutes.
Inelastic Demand-
When price changes, buyers still buy about the same amount.
This is true of things that are necessities (medicine) and items with virtually no
substitutes. For example, if you need a medication to live, and the price of that
medicine doubles, you are going to buy the same amount of that medicine no matter
the price.
Elasticity of Supply- measures how responsive suppliers are to a change in price. The
main thing that affects the elasticity of supply is time needed to product the product. I
can easily provide more haircuts if the price doubles, but the supply of cargo planes
will be more inelastic because it takes more time to produce them.
Lesson 22:
Key Ideas: Macroeconomics is the study of the economy as a whole. The goals of
macroeconomics are to promote economic growth, full employment, and price stability.
Economic Growth- measured by increasing Real Gross Domestic Product.
Full Employment- usually 4-6%; absence of cyclical unemployment
Price Stability- no destabilizing inflation; measured by the Consumer Price Index
Lesson 23:
Key Ideas: Gross Domestic Product is a key economic indicator that allows economists to
see if economic growth is being achieved. It is not a perfect measure of the economy,
but it is one useful indicator.
Gross Domestic Product: The dollar value of all final goods and services produced within
a country’s borders in year.
Real Gross Domestic Product: GDP adjusted for inflation (allows accurate comparison from
year to year, taking out changes in prices)