Markets and You Module Note Guide

Will the set price lead to a shortage or to a surplus in this market? Maximum

"The maximum price, or "price ceiling," is a price set below the equilibrium price. Note that at the maximum price, the quantity demanded is significantly more than the quantity supplied. For that reason, additional intervention to help producers deal with a shortage may be required." When the price is set below the equilibrium price for a good or service, the quantity demanded will exceed the quantity supplied at that price. This will result in a shortage of goods or services.

Will the set price lead to a shortage or to a surplus in this market? Minimum graph

"The minimum price, or "price floor," is a price set above the equilibrium price. Note that at the minimum price, the quantity demanded is significantly less than the quantity supplied. For that reason, additional intervention to help producers deal with a surplus may be required." When the price is set above the equilibrium price for a good or service, the quantity supplied will exceed the quantity demanded at that price. This will result in a surplus of goods or services.

Identify three ways people can safeguard their ideas and inventions through the U.S. government.

- Patents protect inventions, copyrights cover artistic productions like books and songs, and trademarks are brand names associated with goods or services.

Explain how the three safeguards you identified above are incentives to produce for people and businesses.

- These protections help ensure that an inventor can profit from their work. Copyrights, patents, and related safeguards are incentives to create and produce new things. A free market economy thrives on innovation. Providing options for creators of products and content to protect their works encourages experimentation and novelty. Invention and creativity help start and grow businesses, expand the economy, and advance society overall.

Non- Price Competition In a monopolistically competitive market, such as clothing, there are many sellers. To attract customers these businesses must compete on more than just price.

- They must convince consumers that they have superior, higher quality products. - They must create a memorable brand name and catchy slogans hoping to win customer loyalty. - They might offer extra benefits for purchasing their brand, like free shipping with no taxes, free limited time warranties, or low-cost maintenance or upgrade plans. - They might promise free trials to entice you to try their product instead of their competitor's brand.

Explain the "big idea" or why understanding production possibilities curves is meaningful.

-You can't technically create extra time. However, there is a way for you to expand your PPC to reach point F and beyond. You can increase your potential and widen your choice possibilities in just about any situation. This just might be the most important thing you learn in this course. The answer is investing in improved or increased resources. - As a business owner, you can invest in more physical capital and in your workers. Broadly, at the individual level, the more education, experiences, training, and knowledge you gain, the more options you will have available to you. Not only that, by expanding your PPC you are better able to recognize the choice options and opportunities others may miss.

Consumer goods=

= resource acquired for direct use

What does a production possibilities curve, or PPC, illustrate?

A graph illustrating the possible output combinations of two products based on a set amount of resources.

Monopoly

A monopoly exists when a single company has control over the market for a particular good or service. It has high barriers to market entry. That means it is difficult to become a producer and more likely only one company, or firm, will be the sole producer of a good or service. An example of a barrier to entry is a patent, which gives the patent owner the exclusive right to producing and profiting from the product. Because a single firm controls the market, the firm is a "price setter." The "price setter" charges whatever price they want. In the free market economy of the United States, competition is valued as a way to protect consumer choice and freedom. Therefore, while there are incentives to innovate like patents, there are also laws aimed at preventing monopolies. Amazon© has amassed significant market share in the online retail sales market, and some allege it has or soon will have monopoly power.

Land

All the natural physical resources necessary to your product or service

Oligopoly

An oligopoly is a group of companies producing a similar good that works together to set the price and to determine how much to supply. Whereas a single producer characterizes a monopoly, in an oligopoly a group of producers joins forces and works together to dominate the market for a good or service. They build an alliance to gain an edge on remaining competition. This alliance is a "price leader," determining the price to charge for the product. Entry into an oligopolistic market is complicated because the producers must accept the new company into their "club" or face a greater risk of failure. An example of oligopoly is the international market for oil, tightly controlled by OPEC (Organization of the Petroleum Exporting Countries).

Commons

Another impact of externalities can be on the use and misuse of common goods. A common good is property that everyone owns equally, such as tax-supported land or structures like public parks, schools, or beaches. Everyone helps pay for common goods through taxes and has equal opportunity to use them. People have fewer incentives to take care of public goods compared with private goods. A person is more likely to clean and organize the bathroom at home than the school bathroom, because a person individually owns the home property and feels more responsible for it. Most economists think increasing private property rather than reducing it (public parks, preservation areas, and other government-owned land) will reduce pollution because people will care more about individually owned property. For the same reason, most economists prefer charging a pollution tax to increasing regulation.

Microfinance

Around the world people are microfinancing, or lending small sums called microloans, that make a big difference. Microfinance can enable someone to start or grow their own business. There are multiple organizations that help transfer donated money to people requesting it. An example is Grameen Bank, a community bank that connects lenders with rural borrowers and does not require collateral. The bank and its founder received the Nobel Peace Prize for their work. Microfinance results in many externalities, generally considered positive, for all parts of the circular-flow diagram. It affects the local, national, and international levels of economy.

Local impact

Banks offer loans in your community to help people purchase homes and start or expand businesses. Consider that a new department store, built through a bank loan, not only may generate profit for the company but also employs dozens of local residents. These employees may now be able to afford more recreation goods and services and perhaps obtain loans to buy larger homes. However, growth and development can create a negative externality for individuals who own property where property developers want to expand. Sometimes planning for the commons, like new roads or parks, involves addressing private property like homes that are in the path of the planned development. The use of eminent domain has local and individual impact. Under eminent domain, government can take control of this private property. In return, the original owners are entitled to "just compensation" for the property. In this context, "just" refers to "fair." The property owner might disagree with what the government offers in payment or be unwilling to negotiate at all. Conflicts over eminent domain have been heard in U.S. courts.

National impact

Beyond local effects, there are national and international externalities as well. All U.S. workers contribute to various national programs through income and payroll taxes. You read about education and public health measures like vaccines earlier. However, not everyone directly benefits from a program like unemployment insurance or Medicaid. They might indirectly benefit, however. For example, unemployment insurance during an economic downturn benefits businesses by helping people continue spending money. The business owners aren't receiving unemployment checks, but they are benefiting from their customers who are.

Horizontal consolidation

Burger Joint buying out Burgers and Shakes

Vertical consolidation

Clothing company buying a cotton farm

Fear Characteristics

Emotion targeted by advertising

Free riders

Externalities may also create the "problem" of free riders. The free rider problem refers to how people can benefit from a good without necessarily paying for the costs of that good. Whether free riders are a problem—that is, whether they represent a negative or positive externality—depends on perspective. Since most people receive certain vaccines in the United States by law, the occasional person that refuses a vaccine still benefits because that person is not likely to encounter anyone who has the disease. Everyone benefits when a small group convinces government to pass new regulations on pollution, pay for building new schools or parks, or fund new programs that create jobs. If your aunt repaints her house, her neighbors benefit from a prettier view and increased resale value. If you get a new technology gadget, you may gain new friends by meeting curious people who wish to learn about it. People who do pay or otherwise participate in public programs may resent other people who benefit despite not contributing to the program. However, externalities that cause free riders can also have more far-reaching long-term benefits for everyone. For example, vaccines have led to the eradication of many previously deadly or debilitating diseases, such as polio. Also, parents and businesses who donate to school programs can improve an entire community over time regardless of who spent the extra money in the first place.

Private consumption

Externalities occur with private consumption, which is the individual purchasing of goods and services. Often people think of externalities on a large scale, like pollution caused by "factories" rather than the people who run them. Our personal, daily use of goods and services affects others, as well. When you consume a good or service, your actions can affect people you do not even know. For example, let's say you use public transportation instead of driving your own car to work. Through that private choice, you are reducing the pollutants that enter the air, which benefits everyone. If you choose to vape in a public place, you are exposing everyone near you to dangerous aerosolized particles. When you buy a shirt or pay for a haircut, you are encouraging that company's business practices to continue. Some people research businesses to make sure the money they spend on their product does not support a practice they disagree with, such as child labor, animal testing, or destruction of natural resources. Consumers wishing to strengthen the American economy may choose to buy products made in the United States whenever possible.

Monopolistic competition

Firms try to make their products stand out

Corporation

Form of business organization that distributes ownership and profits among shareholders.

Limited liability company

Form of business organization that reduces personal finical and legal responsibility for the owners

Advertising

Form of nonprice competition

Public safety and well-being

Government regulates business activities to ensure the well-being of all people. Rules regarding manufacturing of food, toys, and other goods help prevent injuries and spread of disease. For example, government bans the use of certain chemicals in making toys to protect children from their harmful effects. Other regulations protect people on the job. An example is the Family Medical Leave Act, or FMLA. This program protects a person's job in case they must take extended time off to care for themselves or a family member. Workman's Compensation is a program that provides benefits to those hurt on the job who cannot work.

Protection of industry

Government regulations help protect hardworking business owners from unfair practices. For example, a minimum price helps prevent a company from flooding the market with cheap goods. It prevents driving others out of business from such an event. This helps protect choice for consumers. Government rules related to trade with other countries help ensure a market for goods produced within the nation.

Revenue collection

Government rules that require licensing produce revenue (income). Many businesses and individuals must first obtain a license or special certification. They pay fees to obtain or renew this licensing. An example is a health inspection of a restaurant. Another is a medical license for a doctor. The fees help fund government operations. The revenue helps fund the monitoring of that particular industry.

Prevent economic extremes

Government rules that require licensing produce revenue (income). Many businesses and individuals must first obtain a license or special certification. They pay fees to obtain or renew this licensing. An example is a health inspection of a restaurant. Another is a medical license for a doctor. The fees help fund government operations. The revenue helps fund the monitoring of that particular industry. Government regulations help prevent extreme swings in economic conditions, such as in prices and job availability. For example, stock market rules help prevent another crisis as deep as the 1930s Great Depression. The Securities and Exchange Commission (SEC) makes rules for and oversees the stock market. Other rules help prevent the runaway price increases of the 1970s, especially for critical goods. The system is not perfect, and the economy still has ups and downs. However, the goal is to prevent very high unemployment and prices. Regulation also seeks to prevent surpluses or shortages of products.

Oligopoly Characteristics

Highest chance for firms working together

Perfectly elastic demand

Horizontal demand curve

Price Competition

In a monopoly, the company appears to have an advantage since people have no option to purchase elsewhere no matter where the company sets the price. However, a monopoly's leaders may unintentionally encourage competition for themselves by setting prices too high. This could encourage another company to enter the market with a slightly different version of the product, potentially undermining the monopoly's market share. (Whether this is even possible is highly dependent on the product itself).

Monopolistic Competition

In this market, there are relatively few barriers to entry. Rather than work together to set price, producers compete against one another to gain consumers. Price is set by competition rather than by a single store or group of stores working together. It's every business owner for themselves. Companies are highly competitive in their attempts to gain customer loyalty by offering the best customer service and product quality possible. Advertising is an important way these firms compete. Most product markets in the United States are monopolistically competitive.

Entrepreneurship

Intelligence, imagination, and ability to take the risks that are needed to start up and maintain a business, a component of labor

Monopoly Characteristics

Most advantageous to business owner

Pure competition

Most advantageous to consumer

International impact

On the international scale, consider foreign aid. When you pay taxes, you are transferring money to the government. A portion of taxpayer dollars goes to fund assistance to foreign countries, which you may or may not support. You might ask: why is the government spending your money on people who are not U.S. citizens? Kenya, for example, receives U.S. foreign aid. It is primarily humanitarian assistance that helps in areas like food scarcity, child health, and maternal health. Foreign relations are important in a global economy, and many Americans consider it a duty to help those in need. Given the world's interconnectedness, improving health conditions in one country can help protect or improve health elsewhere. In addition, the assistance may help people in foreign countries to improve their societies and ability to take part in international trade. U.S. businesses and individuals might purchase products imported from those countries that they otherwise would be unable to access.

Free resources

One impact of externalities is on the use of free resources. Free resources refer to productive ingredients that exist in quantities greater than people need or want for production. However, this does not mean they are unlimited or not valuable. For example, air is available in great quantities and there is more than enough air to supply our needs and wants. Yet, it is still limited in quantity by our atmosphere and valuable to life. People often do not think of the potential impact on others when using free resources. For example, a factory might dump waste into the river. The water in the river is a free resource, so dumping in the river is a cheap way to dispose of the industrial waste. However, the action pollutes the water for others, whose health and quality of life may deteriorate as a result.

Calculate Revenue

Price x Quantity Sold = Revenue

Purely competitive

Price-takers, easy entry and exit into and from this market type, products are the same (homogenous), many sellers, shared information

Minimum Point

Production for a company that manufactures goods requires significant investment in equipment and machinery. Then, the company may add employees and produce goods efficiently and at a lower cost per item resulting in a downward slope. At some point, however, hiring additional workers will not result in a lower cost per item as the company may not have enough equipment for the new employee. At that point, the marginal cost curve begins to curve upward due to the Law of Diminishing Returns (at some point, adding resources will result in less output per additional unit of product).

Sole proprietorship

Single owner of a business

Labor

The human work that goes into the business—physical and mental skills

Capital

The tools humans create to make the business more efficient—financial and physical Physical capital—buildings, land to build on, machines like pizza ovens, vehicles, credit card machines Financial capital—the funds to pay for all other resources

Identify the profit-maximizing formula:

Total Revenue − Total Costs = Net - Subtract the cost of doing business from the revenue generated. - This gives you the net income for the business. If the net income is a negative number, the business has lost money. If it is a positive number, it has made a profit.

True or False: All economic players demand products in the financial market.

True! Individuals, businesses, governments, and all of those in foreign countries purchase financial assets and obtain loans from U.S.-based banks and other financial institutions.

Partnership

Type of business organization where two or more people share ownership and all liability

Which economic player(s) are the primary suppliers in the factor market?

You are. Well, individuals and households in general are the suppliers of labor, an essential factor of production. Businesses can be suppliers in the factor market as well, those that produce capital goods such as machinery.

Materials and work that contribute to a product or service are called

__factors of production_______________.

Producing at the quantity where marginal ______________ and marginal _________________ intersect is called the _____________.

_cost, revenues, and _QPM (profit-maximizing point)___

Externalities exist because you cannot account for all of the ____________ and _________________ of an action.

_costs__, benefits_

Creating _____________ around externalities is difficult, since it is extremely difficult to quantify the impact of externalities.

_incentives_______________

When a product or service is best produced by a single supplier, it can result in a

_natural monopoly.

Payment a business receives from customers for its products is

_revenue_______________.

In _______________, a business firm brings together all the processes required to create a product under one company.

_vertical consolidation_

Senses

appeals to one of the five senses

Firms that act in _________________ try to control the market by setting prices in secret.

collusion

purely or perfectly competitive markets Price Demand

demand is perfectly elastic, meaning it is very sensitive to changes in price. If a company wants to stay in business, it needs to be aware of how much consumers are willing to pay. Review the image and see how this looks when plotted on a demand curve.

The point of _______________ places limits on business expansion.

diminishing returns

Expansion of a society's ability to produce goods and services is known as _______________.

economic growth

Ritual

encourages people to make the product a part of their daily routine with words like "always"

Social Values

encourages use of products that are popular or will improve social status

Your decisions have unintended consequences on people, which are known as ________________. These can be positive or negative.

externalities

The __________ market is the one where businesses buy the raw materials, labor service, and machinery needed to make goods and services possible.

factor

A ______________ economy is one where people earn income providing on-demand goods and services.

gig___

Fear

highlights a negative outcome with or without the product

In ________________, similar businesses combine into one company. In a monopoly, the business firm sets the price.

horizontal consolidation_

Emotion

implies the product will help the user to avoid negative feelings or increase positive feelings

Investing in _________________ resources increases potential and choice possibilities in almost any situation.

improved/increased

Costs and benefits that encourage you to make a choice or take an action are _______________.

incentives__

Business Firms

include any company type that earns income from the sale of goods and services.

Households

include individuals like you and those living in the same home. Circular-flow diagrams interchangeably use the terms "households" and "individuals."

A firm's market power relies on their ability to _________________ their market share.

increase

Before hiring more workers or adding capital, a business must decide whether the additional ______________ will result in additional __________________.

investment_; revenue_

product market

is the buying and selling of finished goods and services, like your morning latte.

factor market

is the exchange of the factors of production including components of land, labor, and capital, such as a coffee company purchasing equipment to process coffee beans.

Compensation for _________________ is often the highest variable cost for a business.

labor

__________________ is the cost of producing one additional unit of a good or service.

marginal cost

To maximize profits, business owners should use _, which determines the changes in production cost and revenue with the addition of one unit of a product.

marginal cost analysis

The money collected by producing one additional unit is called _________________.

marginal revenue

The portion of total sales in a market that goes to one business is the __ _______________.

market share

Businesses organize to ________________ risk and ________________ profits.

minimize_and maximize _

The federal ________________ is a type of price control related to wages for labor.

minimum wage

In a _______________, a business firm must change its price to suit consumer _______________.

oligopoly; demand

Giving up an activity or item for the activity or item you chose is called a _______________.

opportunity cost

Successful businesses must consider all ___________.

options_______

The government regulates economic activity to reduce unemployment, ensure ________________, and promote _______________.

price stability, _economic growth_

The ___ ______________ market is the one where consumers buy goods and services.

product

To maximize profits, a business must set the _____________ closest to where ______________ equals ________________, then set the price based on ______________ for that quantity.

quantity, marginal revenue, marginal cost_, marginal demand___

List examples of natural monopolies:

railroads, pipelines, and cable television

financial market

refers to the stock market and banking services, including the loans all the other economic players use to meet their goals.

Government

represents any lawmaking body (local, state, or national) that collects taxes and provides services to individuals and businesses.

The rest of the world

represents interaction with all those three groups in foreign countries. It refers to the international trade of import and export products.

Capital goods=

resource obtained by a business from another to produce a consumer good or service (I.e., tools, machinery, intermediate goods)

All resources are ________________.

scarce_

When the government sets a price control too low, it can result in a ___ ______________.

shortage

Some argue that ________________ is an unnecessary expense to the government.

subsides

Financial assistance that some businesses, often farms, receive from the government is called _______________.

subsidy_

When the government sets a price control too high, it can result in a ________________.

surplus_

Consumers seek to maximize their ________________ while businesses seek to maximize their _________________.

utility; profit

In a labor market, businesses are the demanders and _________________ are the suppliers.

workers/individuals