CH. 6 MARKET FORCES

ESSENTIAL QUESTION

Essential Question: How do the laws of supply and demand interact to establish market equilibrium in a perfectly competitive market?

PRICE, QUANTITY, AND MARKET EQUILIBRIUM

A. Learning how the forces of demand and supply determine the market price for goods and services …

B. Market Equilibrium

- 1. Buyers and sellers equally match= the point on graph where the Demand Curve and Supply Curve hit

- 2. Suppliers desire to eliminate surplus because it puts downward pressure on price – surplus- at a given price, the amount by which quantity supplied exceeds the quantity producers are willing and able to sell

PRICE, QUANTITY, AND MARKET EQUILIBRIUM

Market Equilibrium 3. As prices rise, produces increase quantity supplied and

consumers reduce their quantity demanded – shortage- at a given price, the amount by which quantity demanded exceeds quantity supplied= usually forces the prices up

4. No shortage and no surplus = no pressure for price to change- Equilibrium-the quantity consumers are willing and able to buy equals the quantity producers are willing and able to sell. See Figure 6.1, p.165

Sketch a market Equilibrium graph:

PRICE, QUANTITY, AND MARKET EQUILIBRIUM

C. Market Exchange – what to produce, how to produce it, and for whom to produce it -3 Economic Questions

D. Adam Smith’s “invisible hand” – no individual or small group coordinates market activities. Rather it is voluntary choices of buyers and sellers responding only to individual incentives

* Wrote famous book- The Wealth of Nations

PRICE, QUANTITY, AND MARKET EQUILIBRIUM

E. Understand that market exchange is a voluntary activity in which both sides of the market expect to benefit and usually do. Neither buyers nor sellers would participate in the market unless they expected to be better off.

F. Transaction Cost- the cost of time and information needed to carry out market exchange.

- The higher the transaction cost, the less likely the exchange will actually take place

- Example- looking for a summer job without looking at want-ads first

SHIFTS OF THE DEMAND AND SUPPLY CURVES

A. What could shift the Demand curve?

1. Increase in money income of consumers

2. Increase in the price of a substitute

3. Change in expectations that encourage consumers to buy more

4. Growth in population

5. Change in consumer tastes

B. Increase of Demand – consumers more willing to buy product at any price (Figure 6.2-Shift Right)- pg 170

C. Decrease of Demand – consumers less willing to buy product at any price (Figure 6.3-Shift Left)- pg 171

D. Summary of Demand Shifts

1. Rightward = price and quantity increase

2. Leftward = price and quantity decrease

SHIFTS OF DEMAND AND SUPPLY CURVES

E. What could shift the Supply curve?

1. Reduction of price of a resource

2. Decline in price of another good

3. Technological breakthrough

4. Change in expectation

5. Increase in number of businesses

6. Taxes and Subsidies (tax breaks)

F. Increase of Supply – producers more willing and able to supply product at every price (Figure 6.4)- p. 172

G. Decrease of Supply – producers less willing and able to supply product at every price (Figure 6.5)- p. 173

H. Summary of Supply Shifts

1. Rightward = decreases price, but increases quantity

2. Leftward = increases price, but decreases quantity

Create one scenario with a partner where the demand curve shifts, and one scenario where the supply curve shifts.

SHIFTING OF THE CURVES

If only 1 curve shifts you can determine the direction and you can determine what will happen to equilibrium price and quantity. If both Curves Shift – outcome is less certain

If Curve shifts in the same direction:

1. Demand curve increases more than supply curve =

equilibrium price increase

2. Supply curve increases more than demand curve =

equilibrium price will decrease

3. Demand curve shifts more than supply curve = price will rise

4. Supply curve shifts more = price will rise

SHIFTING OF THE CURVES

If Curve shifts in opposite directions:

1. Equilibrium price increases if demand increases and supply decreases

2. Equilibrium price decreases if demand decreases and supply Increases

J. 4 Possible Combinations of Change – See (Figure 6.6)- p.175

What are they?