Market Forces

Markets Bring Buyers (demanders) and sellers (suppliers) together Stores Stock Exchanges Even Employment

Market Equilibrium Price where intensions of buyers and sellers match Surplus and Shortage Changes in in Supply or Demand shift the market equilibrium

Changes in Demand Preferences # of Buyers Incomes Price of related good Substitute good Complementary good Consumer Expectation Changes in Quantity demanded

Demand Shift

Determinants of Supply Resource Prices Technology Taxes and Subsidies Prices of other goods Substitution in production Producer Expectations Number of Sellers

Supply Shift

Competition and efficiency Productive efficiency- produce at lowest cost Allocative efficiency- produce what is valued by consumers Disequilibrium- adjustment period

Application: Government Set Prices Price Ceiling Rationing Black Markets Fill gaps Rent Control Price Floor

Comparing Behavioral Economics with Neoclassical Economics Focusing on the mental process behind decisions Improving outcomes by improving decision- making Behavioral economics puts significant emphasis on the mental process driving behavior. Improving outcomes by improving decisions is one of the distinguishing characteristics of behavioral economics. LO1

Bounded Rationality and willpower Bounded rationality- limits on information people can comprehend and act on Limited willpower- limited self discipline in following through with decisions in their own self interest

Neoclassical Economics People have stable preferences that aren’t affected by context People are eager and accurate calculating machines People are good planners who possess plenty of willpower People are almost entirely selfish and self- interested Rationality is the most fundamental point of disagreement between behavioral economics and neoclassical economics. Neoclassical economics makes a number of highly unrealistic assumptions about human capabilities and motivations. LO1