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Chapter 8.1 Market Equilibrium The market system = people acting in their own self interest that guides the economy. EX: When you buy a new wool sweater you send a signal to producers that people want wool sweaters. You buy it based on your want to wear it or gift it—no based on employing people to work in a wool factory. Mkt system driven by self interest. Producers respond to consumers’ signals or wants by employing more factors of production to make sweaters. No one is telling them they have to do it. They do so because they want to make more money. Suppliers or producers make what people want based on what they will buy. The system of markets is the heart of our economic system. We depend on free markets to communicate information between consumers and producers. [Market Flow Chart on Overhead] Demand and Supply are essential to the market system Demand Supply = Consumers = Producers Demand = the quantities of a product that consumers are willing and able to buy at various prices. Law of Demand = P ↓Q or as ↓P Q Market Demand for a product= the sum of all individual consumers’ demands. Market demand is shown by using a demand schedule (chart) and demand curve (graph) [overhead for example] As the price increases people (consumers) demand less. As the price decreases consumers demand more. Supply = the quantities of a product firms are willing and able to make available for sale at various prices. A firms supply at any price depends on the firm’s cost of production Due to Diminishing Marginal Product the cost per unit of output rises as more is produced in SR of Supply = P Q ; ↓P↓Q Producers want to sell their products at the highest price possible in order to make more of a profit. Factors of Production: Land, Labor, Capital, Entrepreneurship [overhead example] Law Equilibrium = the condition of 2 forces exactly balancing one another. In other words, demand and supply in balance. In a market economy, natural economic forces lead to an equilibrium, or balance, of demand and supply. Equilibrium Price = (market price) the price at which the QD equals the QS. Equilibrium Quantity = the quantity that is both demanded and supplied at the equilibrium price. Equilibrium on a graph is marked “E” [overhead for graphing equilibrium]