Instructor4Commentary

Instructor4Commentary - 1 INSTRUCTOR COMMENTARY Chapter...

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INSTRUCTOR COMMENTARY Chapter Reference: Chapter 4 The Market Economy in Action 1. Chapter 4 focuses on the following important points: A. How equilibrium prices (and quantities) change as the market demand function shifts. The market demand function shifts as the “non-price” determinants of demand are changed. If the market demand schedule shifts to the left, a surplus of the product will exist at the initial equilibrium price, and this will cause the price of the product to fall. This will continue until the surplus is eliminated, at the new equilibrium price. If the market demand schedule shifts to the right, a shortage of the product will exist at the initial equilibrium price, and this will cause the price of the product to rise. (text, pp. 94-95) B. How equilibrium prices (and quantities) change as the market supply function shifts. The market supply function shifts as the “non-price” determinants of supply are changed. If the market supply schedule shifts to the right, a surplus will exist at the initial equilibrium price, and this will cause the price of the product to fall. If the market supply schedule shifts to the left, a shortage of the product will exist at the initial equilibrium price, and this will cause the price of the product to rise. (text, p. 96) C. How equilibrium prices (and quantities) change as both the demand and market supply functions shift. An increase in demand and an increase in supply must cause equilibrium market quantity to rise, but equilibrium price may either rise or fall. This is because both of these effects tend to cause equilibrium market quantity to rise, but they have opposite effects on equilibrium price. An increase in demand and a decrease in supply must cause equilibrium price to rise, but equilibrium market quantity may either rise or fall. This is because both of these effects tend to cause equilibrium price to rise, but they have opposite effects on equilibrium quantity. D. How government price controls (minimum and maximum prices set by 1
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law) affect market equilibriums and resource allocation. Governments may set maximums prices that are below equilibrium prices, or minimum prices (price floors) that are above equilibrium prices. Price ceilings tend to cause shortages that cannot be removed by allowing market prices to increase to their equilibrium values. Price floors tend to cause surpluses that cannot be removed by allowing market prices to decrease to their equilibrium values. Prices that are fixed by law tend to reduce the efficiency with which resources are allocated in the economy. (text, pp. 97- 101) E. The causes of market failures. Market failures may occur as a result of: (1) imperfectly competitive conditions in resource or product markets; (2) the existence of externalities (where the production or consumption of the product impacts the well-being of “third parties” who are not directly involved in the purchase or sale of the product; and (3) the existence of “public goods.” (text, pp. 102-110)
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This note was uploaded on 01/12/2012 for the course ECN 211 taught by Professor Kingston during the Spring '08 term at ASU.

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Instructor4Commentary - 1 INSTRUCTOR COMMENTARY Chapter...

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