Introduction to Unit 4: Demand, Supply and Market Equilibrium

Now that we have examined the production possibilities and benefits from trade for an economy, let us now shift our attention to the market for a good or service. Markets are fundamental to most economies. The prices for the majority of goods and services that we consume are set in markets. In the absence of a market, then some central authority sets prices. Even in market type economies such as the United States, some prices are highly regulated. For example, prices of public services such as electricity are set by the government not by the market.

In this section we will focus on the basics of the free market where consumers and producers interact in the market for the good. The overall market could be local, such as for apartments, or it could be a global such as the market for computers. In either case, total demand for the good by consumers is represented by the market demand curve, and total production of the good by producers is shown by the market supply curve. Price and output for the good is determined by the equilibrium of the demand and supply curves.

Once we have covered the basic material of price determination, we will look at the factors that influence demand and supply and how changes in either demand or supply impacts the market. It is important to understand the interaction of demand and supply in the market. Soon in the course we will look at labor markets, capital markets and the national market with aggregate demand and aggregate supply. By understanding the basics covered here, it will be easy to expand into the related material in later sections.

Some key points that will be emphasized are:

• the difference between a movement along a curve and a shift in the curve,
• how changes in production costs affect the supply curve and the market price,
• bottlenecks and their impact on prices.

This unit will also cover material on price ceilings and price floors. A price ceiling sets the maximum price that a good can attain. The ceiling is effective if the maximum price is below the market price. A common example of a price ceiling is a rent control. If you have been following the news, New York City is trying to abolish its obsolete system of price ceilings that were originally imposed immediately after the Second World War to ensure affordable rentals in the city. The ceilings have persisted in a fashion to this day.

LINK TO MAIN SECTION OF UNIT 3 - DEMAND, SUPPLY AND MARKET EQUILIBRIUM