CHAPTER 6 Market Forces · 2019. 2. 10. · 1 CONTEMPORARY ECONOMICS: LESSON 6.1 © SOUTH-WESTERN...

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 6.11

CHAPTER 6

Market Forces

6.1 Price, Quantity, and Market

Equilibrium

6.2 Shifts of Demand and Supply

Curves

6.3 Market Efficiency and Gains from

Exchange


CHAPTER 6

Market Forces

How is market competition different from competition in sports

and in games?

Why do car dealers usually locate together on the outskirts of

town?

What’s 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?

Consider


LESSON 6.1

Price, Quantity,

and Market Equilibrium

Understand how markets reach

equilibrium.

Explain how markets reduce transaction

costs.

Objectives


LESSON 6.3

Price, Quantity,

and Market Equilibrium

equilibrium

surplus

shortage

transaction cost

Key Terms


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

equilibrium.


Equilibrium in the Pizza Market


Surplus Forces

the Price Down

Surplus—at a given price, the amount

by which quantity supplied exceeds

quantity demanded.

As long as quantity supplied exceeds

quantity demanded, the surplus forces

the price lower.


Shortage Forces

the Price Up

Shortage—at a given price, the amount

by which quantity demanded exceeds

quantity supplied.

As long as quantity demanded and

quantity supplied differ, this difference

forces a price change.


Market Forces Lead to

Equilibrium 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.


Market Exchange

Markets answer the questions

What to produce

How to produce it

For whom to produce it


Adam Smith’s

Invisible Hand

Although each individual pursues his or

her own self-interest, the “invisible hand”

of market competition promotes the

general welfare.


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.


Markets Reduce

Transaction Costs

Transaction costs—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.


LESSON 6.2

Shifts of Demand

and Supply Curves

Explain how a shift of the demand curve

affects equilibrium price and quantity.

Explain how a shift of the supply curve

affects equilibrium price and quantity.

Explain what happens to equilibrium

price and quantity if both curves shift.

Objectives


LESSON 6.2

Shifts of Demand

and Supply Curves

increase in demand

decrease in demand

increase in supply

decrease in supply

Key Terms


Shifts of the Demand Curve

A shift of the demand curve means that

quantity demanded changes at each

price.


What Could Shift

the Demand Curve?

An increase in the money income of

consumers

An increase in the price of a substitute

A change in expectations

A growth in the population of consumers

A change in consumer tastes


An Increase in Demand

An increase in demand means that

consumers are now more willing and able

to buy the product at every price.


A Decrease in Demand

A decrease in demand means that

consumers are less willing and able to

buy the product at every price.


Summary of Demand Shifts

If the demand curve shifts rightward,

price and quantity increase.

If the demand curve shifts leftward, price

and quantity decrease.


Shifts of the Supply Curve

A shift of the supply curve means that

quantity supplied changes at each price.


What Could

Shift the Supply Curve?

A reduction in the price of a resource

A decline in the price of another good

these resources could make

A technological breakthrough

A change in expectations


An Increase in Supply

An increase in supply means that

producers are more willing and able to

supply pizza at every price.


A Decrease in Supply

A decrease in supply means that

producers are less willing and able to

supply the product at every price.


Summary of Supply Shifts

If the supply curve shifts rightward, price

decreases but quantity increases.

If supply shifts to the left, price increases

but quantity decreases.


Both Curves Shift

Curves shift in the same direction

Equilibrium quantity will increase.

What happens to price depends on which curve

shifts more.

Curves shift in opposite directions

Equilibrium price will increase if demand increases

and supply decreases.

Equilibrium price will decrease if demand decreases

and supply increases.


Ch

an

ge

in

Su

pp

lyIncreases Decreases

Change in Demand

Equilibrium price change

is indeterminate.

Equilibrium quantity

increases.

Equilibrium price falls.


change is indeterminate.

Equilibrium price rises.


change is indeterminate.

Equilibrium price change

is indeterminate.


decreases.


LESSON 5.2


Identify the determinants of supply, and

explain how a change in each will affect

the supply curve.

Contrast a movement along the supply

curve with a shift of the supply curve.

Objectives


LESSON 5.2


movement along a supply curve

shift of a supply curve

Key Terms


Determinants of Supply

Five determinants of market supply

(other than the price of the good)

Cost of resources used to make the good

Price of other goods these resources could

make

Technology used to make the good

Producer expectations

Number of sellers in the market


Changes in the Price

of Resources

Any change in the costs of resources used to

make a good will affect the supply of the good.

An increase in supply means that producers

are more willing and able to supply more goods

at each price.

An increase in the price of a resource will

reduce supply, meaning a leftward shift of the

supply curve.


Changes in the Prices

of Other Goods

A change in the price of another good

certain resources could make affects the

opportunity cost of making a particular

good.


Changes in Technology

Discoveries in chemistry, biology,

electronics, and many other fields have

created new products, improved existing

products, and lowered the cost of

production.


Changes in

Producer Expectations

Any change that affects producer

expectations about profitability can affect

market supply.

An expectation of higher prices in the

future could either increase or decrease

current supply, depending on the good.


Changes in the Number of

Sellers in the Market

Government regulations may influence

market supply.

Any government action that affects a

market’s profitability, such as a change in

business taxes, could shift the supply

curve.


An Increase in the

Market Supply for Pizza

12 16 20 24 28Millions of pizzas per week

$15

12

9

6

3

0

Price

pe

r p

izza

S S'

gh


An Decrease in the

Market Supply for Pizza

12 16 20 24 28Millions of pizzas per week

$15

12

9

6

3

0

Price

pe

r p

izza

SS''

gi


Movements Along a Supply Curve

Versus Shifts of a Supply Curve

A change in price, other things constant,

causes a movement along a supply

curve from one price-quantity

combination to another.

A change in one of the determinants of

supply other than the price causes a

shift of a supply curve, changing

supply.

CHAPTER 6 Market Forces · 2019. 2. 10. · 1 CONTEMPORARY ECONOMICS: LESSON 6.1 © SOUTH-WESTERN...

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Transcript of CHAPTER 6 Market Forces · 2019. 2. 10. · 1 CONTEMPORARY ECONOMICS: LESSON 6.1 © SOUTH-WESTERN...