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Download Markets: Supply & Demand I - University of Wisconsin
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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
