Chapter 4 | Demand and Supply Flashcards
Whats a Market?
Markets connect competition between buyers, competition between sellers, and cooperation between buyers and sellers. Government guarantees of property rights allow markets to function.
Market
the interactions between buyers and sellers.
Market Information
Because any purchase or sale is voluntary, an exchange between a buyer and seller happens only when both sides end up better off.
– Buyers are better off when businesses supply products or services that provide satisfaction (marginal benefit) that is at least as great as the price paid.
– Sellers are better off when the price received is at least as great as marginal opportunity costs.
Property rights
legally enforceable guarantees of ownership of physical, financial, and intellectual property.
Where Do Prices Come From? Price Signals from Combining Demand and Supply
When there are shortages, competition between buyers drives prices up. When there are surpluses, competition between sellers drives prices down.
Prices are the outcome of a market process of competing bids (from buyers) and offers (from sellers).
When the market price turns out to be too low:
– shortage, or excess demand — quantity demanded exceeds quantity supplied.
– shortages create pressure for prices to rise.
– rising prices provide signals and incentives for businesses to increase quantity supplied and for consumers to decrease quantity demanded, eliminating the shortage.
shortage, or excess demand
quantity demanded exceeds quantity supplied.
What happens to prices when there are shortages
shortages create pressure for prices to rise.
What do businesses do when there are rising prices
rising prices provide signals and incentives for businesses to increase quantity supplied and for consumers to decrease quantity demanded, eliminating the shortage.
When the market price turns out to be too high:
– surplus, or excess supply — quantity supplied exceeds quantity demanded.
– surpluses create pressure for prices to fall.
– falling prices provide signals and incentives for businesses to decrease quantity supplied and for consumers to increase quantity demanded, eliminating the surplus.
surplus, or excess supply
quantity supplied exceeds quantity demanded.
What happens when there are surpluses
surpluses create pressure for prices to fall.
What happens when there are falling prices
falling prices provide signals and incentives for businesses to decrease quantity supplied and for consumers to increase quantity demanded, eliminating the surplus.
What happens when prices dont change
Even when prices don’t change, shortages and surpluses also create incentives for frequent quantity adjustments to better coordinate smart choices of businesses and consumers.
When Prices Sit Still: Market-Clearing or Equilibrium Prices
Market-clearing or equilibrium prices balance quantity demanded and quantity supplied, coordinating the smart choices of consumers and businesses.