Chapter 6Market Forces

6.1 Price, Quantity and Market Equilibrium6.2 Shifts of Demand and Supply Curves

6.3 Market Efficiency and Gains from Exchange

What will we learn from 6.1?Understand how markets research

equilibrium

Explain how markets reduce transaction costs

6.1 Price and QuantityEquilibrium- The quantity consumers are

willing and able to buy equals the quantity producers are willing and able to sell.

EX- You make 5 cars because you have 5 buyers for those cars. Equal amount of buyers for products.

Too much?Surplus- At a given price, the amount by

which the quantity supplied was greater than demand.

EX- You ordered a 100 hotdogs for a party and 10 people showed up. Unless everyone eats 10 hotdogs each, you will have a surplus of hotdogs.

Too little?Shortage- Demand exceed supply. (The short

version)

EX- You buy 10 hotdogs and a 100 people show up. Unless you cut each hotdog into 10 smaller pieces, you will have a shortage.

PS. How coined the phrase “Invisible Hand”?

Transaction CostsTransaction Costs- The cost of time and

information needed to carry out market exchange.

EX- You want a job. Should you go from store to store asking if they are hiring or should you look at the help wanted ads or internet to see who is hiring so you don’t waste time going to places that are not hiring? What should you do?

6.2 Shifts of Demand and Supply CurveWhat could Shift the Demand Curve?1. Increase in the money income of consumers.2. An increase in the price of a substitute such

as tacos or a decrease in the price of a complement, such as a drink.

3. A change in expectations that encourages consumers to buy more pizza now.

4. A growth in the population of consumers.5. A change in consumer tastes in products.

Increase in DemandIncrease in Demand- Consumers are more

willing and able to buy the products at every price.

EX- No matter what the price, people are still buying the product. When demand is not met, it causes a shortage and prices go up and people are still willing to pay higher prices for the same product.

Decrease in DemandDecrease in Demand- Consumers are less

willing and able to buy a product at every price.

EX- A 12 pack of Coke looks good at $4.00 a 12 pack, but, you will not buy it at $4.50 a 12 pack.

Supply CurveWhat could shift the supply curve?1. A reduction in the price of a resource used

to make a product.2. Decline in the price of another good these

resources could make.3. Technological breakthrough.4. A change in expectations that encourage

expansion.5. An increased number of providers of

products.

Decrease in SupplyDecrease in Supply- Producers are less

willing and able to supply the product at every price.

EX- A decrease in supply will cause a shortage and cause prices to do what? Producers are only willing to produce the product as long as they are getting the right price for it.

6.3 Market Efficiency and Gains from ExchangeWhat we will learn!The difference between productive efficiency

and allocative efficiency.Explain what happens when government

imposes price floors and price ceilings.Identify the benefits that consumers and

producers get from market exchange.

Making stuff right!Productive Efficiency- Occurs when a firm

produces at the lowest possible cost per unit.

EX- The company sells an item at a certain price and still makes a profit. Wal-Mart is famous for listing “price per unit”. This is a way to tell if you are getting the best deal or not.

Making the Stuff RightAllocative Efficiency- Occurs when a firm

produces the output most valued by consumers.

EX- Nike vs. ReebokNike and Reebok have to make good products

or people will not buy their shoes from either company.

DisequilibriumDisequilibrium- A mismatch between quantity

demanded and quantity supplied as the market seeks equilibrium.

Price Floor- A minimum legal price below which a product cannot be sold.

Price Ceiling- A maximum legal selling price above which a product can’t be sold.

SurplusConsumer Surplus- The difference between

the total amount consumers are willing and able to pay for a given quantity of a good and what they actually pay.

Ex- Just because there is a price for an item, people still may pay more for it if they deem it worthy.