The Market and Price System CHAPTER 3 © 2016 CENGAGE LEARNING. ALL RIGHTS RESERVED. MAY NOT BE...

The Market and Price SystemCHAPTER 3

© 2016 CENGAGE LEARNING. ALL RIGHTS RESERVED. MAY NOT BE COPIED, SCANNED, OR DUPLICATED, IN WHOLE OR IN PART, EXCEPT FOR USE AS PERMITTED IN A LICENSE DISTRIBUTED WITH A CERTAIN PRODUCT OR SERVICE OR OTHERWISE ON A PASSWORD-PROTECTED WEBSITE FOR CLASSROOM USE.


◦ Allocation Systems determine who gets goods and services and who does not.

◦ A market is a place or service that enables buyers and sellers to exchange goods and services.

◦ Barter is the exchange of goods and services directly, without the involvement of money.

◦ Monetary exchanges involve exchanging money for goods and services.

Markets and Exchange

Market


◦ A place or service that enables buyers and sellers to exchange goods and services

◦ Refers to the interaction of buyers and sellers◦ May be a specific location, like the supermarket, or may

be the exchanges of goods and services at many different locations, like the foreign exchange market

Bartering◦ The exchange of goods and services directly, without

money.◦ Requires a double coincidence of wants.◦ The Internet has reduced the transaction costs of

bartering.


Demand vs. Quantity Demanded


◦ Demand is the amount of a product that people are willing and able to purchase at each possible price during a given period of time.

◦ The quantity demanded is the amount of a product that people are willing and able to purchase at one, specific price.

Law of Demand


Law of Demand

◦ As price of a good rises, consumers buy less.◦ As price of a good falls, consumers buy more.◦ Depicts the inverse quantity-price relationship with all

else assumed to be constant.

Determinants of Demand


Representations of Demand


Demand Schedule: A list of prices and corresponding quantities demanded of a particular good or service.

Demand Curve: A graph of the demand schedule with price on the vertical axis and quantity demanded on the horizontal axis.

Demand Schedule and Demand Curve for Access Time


Aggregation of Demand


Increases and Decreases in Demand


Change in Demand and Quantity Demanded◦ Change in Demand - shift in entire demand curve in

response to a change in a determinant of demand (a ceteris paribus variable).

◦ Change in Quantity Demanded - movement along the same demand curve in response to a price change.


Change in Demand vs. Change in the Quantity Demanded


Factors that Shift Demand


Supply vs. Quantity Supplied◦ Supply is the amount of a good or service that producers

are willing and able to offer for sale at each possible price during a period of time, all else constant.

◦ The quantity supplied is the amount sellers are willing and able to offer for sale during a period of time at a specific price, all else constant.


Law of Supply


Law of Supply

◦ As the price of a product rises, producers will be willing to supply more, and vice versa.

◦ The height of the supply curve at any quantity shows the minimum price necessary to induce producers to supply that next unit to market.

◦ The height of the supply curve at any quantity also shows the opportunity cost of producing the next unit of the good.

Representations of Supply


Supply Schedule: A table or list of the prices and corresponding quantities supplied of a particular good or service. It is the price-quantity relationship presented in tabular form.

Supply Curve: A graph of the supply schedule with price on the vertical axis and quantity supplied on the horizontal axis.

Supply Schedule and Supply Curve for Access Time


Aggregation of Supply


Changes in Supply and Quantity Supplied◦ Change in Supply - shift in entire supply curve.◦ Change in Quantity Supplied - movement along the same

supply curve in response to a price change.


Factors that Shift Supply


Decrease in Supply


Increase in Supply


Change in Supply vs. Change in the Quantity Supplied


Equilibrium Equilibrium is the price and quantity at which the quantity supplied and the quantity demanded are equal.

A market is said to be in disequilibrium at all points at which the quantities demanded and supplied are not equal.◦ A surplus occurs whenever Qs>Qd.◦ A shortage occurs whenever Qd>Qs.◦ Surpluses and shortages can be resolved with price

changes.


Equilibrium


The Effects of a Shift of the Demand Curve


The Effects of a Shift of the Supply Curve


The Market and Price System CHAPTER 3 © 2016 CENGAGE LEARNING. ALL RIGHTS RESERVED. MAY NOT BE...

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