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6.1 Price, Quantity, and Market Equilibrium
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Market Forces
6.1 Price, Quantity, and Market
Equilibrium
6.2 Shifts of Demand and Supply
Curves
6.3 Market Efficiency and Gains
from Exchange
CONTEMPORARY ECONOMICS
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6.1 Price, Quantity, and Market Equilibrium
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CONSIDER
 How is market competition different from competition in
sports and in games?
 Why do car dealers usually locate together on the
outskirts of town?
 What’s the difference between making stuff right and
making the right stuff?
 Why do government efforts to keep rents low usually
lead to a housing shortage?
 Why do consumers benefit nearly as much from a low
price as from a zero price?
CONTEMPORARY ECONOMICS
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6.1 Price, Quantity, and
Market Equilibrium
Objectives
 Understand how markets reach
equilibrium.
 Explain how markets reduce
transaction costs.
CONTEMPORARY ECONOMICS
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6.1 Price, Quantity, and
Market Equilibrium
Key Terms
 market equilibrium
 surplus
 shortage
 transaction cost
CONTEMPORARY ECONOMICS
© Thomson South-Western
6.1 Price, Quantity, and Market Equilibrium
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Market Equilibrium
When the quantity that consumers are
willing and able to buy equals the quantity
that producers are willing and able to sell,
that market reaches market equilibrium.
CONTEMPORARY ECONOMICS
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6.1 Price, Quantity, and Market Equilibrium
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Equilibrium in the Pizza Market
Figure 6.1
CONTEMPORARY ECONOMICS
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6.1 Price, Quantity, and Market Equilibrium
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Surplus Forces the Price Down
At a given price, the amount by which
quantity supplied exceeds quantity
demanded is called the surplus.
As long as quantity supplied exceeds
quantity demanded, the surplus forces the
price lower.
CONTEMPORARY ECONOMICS
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6.1 Price, Quantity, and Market Equilibrium
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Shortage Forces the Price Up
At a given price, the amount by which
quantity demanded exceeds quantity
supplied is called the shortage.
As long as quantity demanded and
quantity supplied differ, this difference
forces a price change.
CONTEMPORARY ECONOMICS
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6.1 Price, Quantity, and Market Equilibrium
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Market Forces Lead to
Equilibrium Price and Quantity
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The equilibrium price, or market-clearing
price, equates quantity demanded with
quantity supplied.
Because there is no shortage and no
surplus, there is no longer any pressure
for the price to change.
CONTEMPORARY ECONOMICS
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6.1 Price, Quantity, and Market Equilibrium
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Market Exchange
Markets answer the questions
What to produce
How to produce it
For whom to produce it
CONTEMPORARY ECONOMICS
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6.1 Price, Quantity, and Market Equilibrium
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Adam Smith’s Invisible Hand
Although each individual pursues his or
her own self-interest, the “invisible hand”
of market competition promotes the
general welfare.
CONTEMPORARY ECONOMICS
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6.1 Price, Quantity, and Market Equilibrium
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Market Exchange Is Voluntary
Neither buyers nor sellers would
participate in the market unless they
expected to be better off.
Prices help people recognize market
opportunities to make better choices as
consumers and as producers.
CONTEMPORARY ECONOMICS
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6.1 Price, Quantity, and Market Equilibrium
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Markets Reduce Transaction Costs
Transaction costs are the cost of time
and information needed to carry out
market exchange.
The higher the transaction cost, the less
likely the exchange will take place.
CONTEMPORARY ECONOMICS
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