Download Chap. 6.1

Chap. 6.1
Market Forces
Market Equilibrium

Equilibrium- when the quantity
consumers are willing and able
to buy equals the quantity that
producers are willing and able
to sell
Surplus
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The amount by which quantity
supplied exceeds quantity
demanded.
A surplus usually forces the
price down.
Shortage
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The amount by which quantity
demanded exceeds quantity
supplied.
A shortage usually forces the
price up.
Market Exchange

Remember that markets answer the
basic economic questions of what to
produce, how to produce it, and for
whom to produce it.

Although each individual pursues his or
her own self-interest, the “invisible
hand” of market competition promotes
the general welfare.
Market Exchange

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First of all, market exchange is
voluntary in which both sides
expect to benefit.
Market prices serve as signals to
both buyers and sellers about the
relative scarcity of the good.
Transaction costs

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Transaction cost- this is the
cost of time and information
needed to carry out market
exchange.
Markets reduce these
transaction costs. How??
Chap. 6.2
Shifts of Demand and Supply Curves
Shifts of the Demand Curve
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What could shift the demand curve?
1. An increase in consumers income
2. An increase in the price of substitute
goods.
3. A change in consumer expectations.
4. A growth in consumer population.
5. A change in consumer taste.
Increase in Demand

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Increase in Demand- this means that
consumers are more willing and able to
buy the product at every price.
Note: This increase in demand would
not affect the supply curve.
A rightward shift of the demand curve
increases both price and quantity (As
long as the supply curve slopes
upward)
Decrease in Demand

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Decrease in Demand- this means that
consumers are less willing and able to
buy the product at every price.
A leftward shift of the demand curve
reduces both price and quantity (As
long as the supply curve slopes
upward).
Shifts of Supply Curve
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What could shift the Supply Curve?
1. A reduction in the prices of resources
2. A decline in the price of another
good that those resources could make
3. A technological breakthrough
4. A change in producers expectations
5. An increase in the # of producers
Increase in Supply

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Increase in Supply- when producers
are more willing and able to supply the
product at every price.
A rightward shift of the supply curve
reduces the price but increases the
quantity (As long as the demand curve
slopes downward).
Decrease in Supply

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Decrease in Supply- when producers
are less willing and able to supply the
product at every price.
A leftward shift of the supply curve
increases the price but reduces the
quantity (As long as the demand curve
slopes downward)
Managing Prices

To keep market functioning smoothly
the gov’t may:
1. Price ceiling
 2. Price Floors
 3. Rationing

Price Ceiling

Gov’t regulation that create a
maximum price for a product
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producers can’t sell their goods above this
price
Price Floors
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Gov’t regulation that sets minimum
price for a product
Example: minimum wage
agricultural product
Rationing
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System in which the gov’t decides how
to distribute producers products
Example: wartime
oil shortages
Side Effects:
1.
2.
3.
unfair: one group may receive
preferential treatment
expensive: take money to put
system into place
Creates a black market: illegal
exchange of goods
Price System
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Self-interest causes a conflict between
consumers/producers

How do producers/consumers
communicate to over come this conflict?
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Prices
Price System
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A type of unspoken language between
producers/consumers the helps to
balance the forces of supply and
demand
Benefits of the Price System
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1. Information:
 Prices give the producers an idea
of what to produce.
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without prices producers would
not know what was the most
profitable to make
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2. Incentives:
Prices gives consumers a
reason (incentive) to buy
products
 Ex: sales, rebates, coupons
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Benefits of the Price System
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3. Choice:
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Higher prices cause producers to
offer more products
4. Efficiency:
Wise use of resources
 With out prices the producers
would not know what consumers
are demanding
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Benefits of the Price System
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. Flexibility:
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Prices can adapt and adjust
quickly
 Ex: freeze wipes out a crop

oil price hit record highs
Limitations on the Price
System
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1. Externalities:
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Effects on the prices that do not
account for all of the cost and
benefits of production
2 types:
 Positive: café opens near a sports arena
 Negative: plant not up holding its
responsibility of controlling pollution
Limitations on the Price
System
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2. Public Good Items:
Police, defense, fire
 Cost paid through taxes, if not
some would refuse to pay even
though they would still enjoy
benefit
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Limitations on the Price
System
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3. Instability:
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Huge price can occur between
extremes
Ex: hurricane hits the gulf coast
= cost of bottled water/lumber
sky rockets