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

What will we learn from 6.1? Understand how markets research equilibrium Explain how markets reduce transaction costs

6.1 Price and Quantity Equilibrium- 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 Costs Transaction 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 Curve What could Shift the Demand Curve? Increase in the money income of consumers. An increase in the price of a substitute such as tacos or a decrease in the price of a complement, such as a drink. A change in expectations that encourages consumers to buy more pizza now. A growth in the population of consumers. A change in consumer tastes in products.

Increase in Demand Increase 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 Demand Decrease 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 Curve What 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 Supply Decrease 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 Exchange What 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 Right Allocative Efficiency- Occurs when a firm produces the output most valued by consumers. EX- Nike vs. Reebok Nike and Reebok have to make good products or people will not buy their shoes from either company.

Disequilibrium Disequilibrium- 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.

Surplus Consumer 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.