Download Chapter 8.1 Market Equilbrium

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]