Market Forces

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Market Forces
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• 6.1 Price, Quantity, and Market Equilibrium
• 6.2 Shifts of Demand and Supply Curves
• 6.3 Market Efficiency and Gains from Exchange

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CONSIDER

• How is market competition different from
  competition in sports and in games?
• Why do car dealers usually locate together on the
  outskirts of town?
• Whats the difference between making stuff right
  and making the right stuff?
• Why do government efforts to keep rents low
  usually lead to a housing shortage?
• Why do consumers benefit nearly as much from a
  low price as from a zero price?

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6.1 Price, Quantity, andMarket Equilibrium
Objectives

• Understand how markets reach equilibrium.
• Explain how markets reduce transaction costs.

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6.1 Price, Quantity, andMarket Equilibrium
Key Terms

• market equilibrium
• surplus
• shortage
• transaction cost

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Market Equilibrium

• When the quantity that consumers are willing and
  able to buy equals the quantity that producers
  are willing and able to sell, that market reaches
  market equilibrium.

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Equilibrium in the Pizza Market
Figure 6.1
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Surplus Forces the Price Down

• At a given price, the amount by which quantity
  supplied exceeds quantity demanded is called the
  surplus.
• As long as quantity supplied exceeds quantity
  demanded, the surplus forces the price lower.

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Shortage Forces the Price Up

• At a given price, the amount by which quantity
  demanded exceeds quantity supplied is called the
  shortage.
• As long as quantity demanded and quantity
  supplied differ, this difference forces a price
  change.

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Market Forces Lead toEquilibrium Price and
Quantity

• The equilibrium price, or market-clearing price,
  equates quantity demanded with quantity supplied.
• Because there is no shortage and no surplus,
  there is no longer any pressure for the price to
  change.

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Market Exchange

• Markets answer the questions
• What to produce
• How to produce it
• For whom to produce it

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Adam Smiths Invisible Hand

• Although each individual pursues his or her own
  self-interest, the invisible hand of market
  competition promotes the general welfare.

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Market Exchange Is Voluntary

• Neither buyers nor sellers would participate in
  the market unless they expected to be better off.
• Prices help people recognize market opportunities
  to make better choices as consumers and as
  producers.

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Markets Reduce Transaction Costs

• Transaction costs are the cost of time and
  information needed to carry out market exchange.
• The higher the transaction cost, the less likely
  the exchange will take place.