Transcript Markets: Supply & Demand I - University of Wisconsin

Markets
What Is A Market

buyers

Sellers
particular good or service
 voluntary transactions
 information & property rights

Property Rights
What Guides Decision-Making
resource ownership
 incentive to get the most out resources

scarcity
 what to produce?
 how to produce it?
 who gets it?

Choosing Between Alternatives
• People do things that make them better off.
• Do it if……
• MB > MC
• Opportunity Cost
• Choosing is Refusing!
Producers/Sellers (Supply)
• People do things that make them better off.
• For a producer, the benefit is the price received from
selling the good.
• For the producer, the cost is the opportunity cost of the
materials and risk involved in producing the good.
• MB > MC
The World is Full
University
of Peopleof Wisconsin-Eau Claire
The World is Full of People
Let’s Graph it University of Wisconsin-Eau Claire
Supply ScheduleUniversity
& SupplyofCurve
Wisconsin-Eau Claire
Supply
Sellers
Price
 price of inputs, technology, weather, # of sellers


All else equal, the quantity supplied of a good varies
directly with the price of that good

P ↑ → Qs ↑

Law of Supply
P↓
→
Qs ↓
Law of Supply (Incentives)

sellers could supply other things
price → opportunity cost
 high price → produce/sell more

higher price means more incentive to produce this good
relative to what else you could do
 supply represents marginal cost (willingness to sell)

Skipping class (lecture), Working (leisure time)
 Wheat & Oranges in Flansas, Ethanol & Corn
 Stuff vs. Clean Air, Housing vs. Green Space

Consumers/Buyers (Demand)
• People do things that make them better off.
• For a buyer, the benefit is the satisfaction from consuming
the good.
• For a buyer, the cost is the price paid for the good (what is
given up).
• MB > MC
The World is Full
University
of Peopleof Wisconsin-Eau Claire
The World is Full of People
Let’s Graph it University of Wisconsin-Eau Claire
Demand Schedule
University
& Demand
of Wisconsin-Eau
Curve
Claire
Demand
Buyers
price
 income, price of other goods, tastes & preferences, # of
buyers


All else equal, the quantity demanded of a good varies
inversely with the price of that good

P ↑ → Qd ↓

Law of Demand
P↓ →
Qd ↑
Law of Demand (Incentives)

consumers could buy other things
price → opportunity cost
 high price → purchase less

higher price means less incentive to consume this good
relative to what else you could do
 demand represents value (willingness to pay)

Fireballs, Candy-bar, Beer or Soda
 Washing Machine
 Stuff vs. Clean Air, Housing vs. Green Space

Equilibrium: How do Markets Work?

Buyers and sellers each perform cost/benefit analysis.
• Buyers

Price is a measure of relative scarcity.

Price represents opportunity cost.

Price sends signals/incentives to players.
• Sellers
Equilibrium : How do Markets Work?
Equilibrium Price
quantity supplied = quantity demanded
 market clears: no shortage…..no surplus
 no tendency for change

• Buyers
Equilibrium
• Sellers
• Buyers
Equilibrium
• Sellers
Equilibrium : How do Markets Work?
Price & Relative Scarcity
the unit by which we measure relative scarcity
 determined by interaction of supply & demand

if a product becomes relatively more scarce, P ↑
 if a product becomes relatively less scarce, P ↓

Equilibrium : How do Markets Work?
Markets Are Usually A Good Way To
Organize economic Activity
goods go to those who value them most
 goods are produced by those with lowest cost

voluntary transactions create well-being
 efficient allocation of scarce resources
 society’s well-being is maximized


not everyone is happy