1. CHAPTER 6Market 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: LESSON 6.1

2. Consider CHAPTER 6Market Forces 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: LESSON 6.1

3. Objectives LESSON 6.1 Price, Quantity, and Market Equilibrium Understand how markets reach equilibrium. Explain how markets reduce transaction costs. CONTEMPORARY ECONOMICS: LESSON 6.1

4. Key Terms LESSON 6.3 Price, Quantity, and Market Equilibrium equilibrium surplus shortage transaction cost CONTEMPORARY ECONOMICS: LESSON 6.1

5. 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 equilibrium. CONTEMPORARY ECONOMICS: LESSON 6.1

6. Equilibrium in the Pizza Market CONTEMPORARY ECONOMICS: LESSON 6.1

7. Surplus Forces the Price Down • Surplus—at a given price, the amount by which quantity supplied exceeds quantity demanded. • As long as quantity supplied exceeds quantity demanded, the surplus forces the price lower. CONTEMPORARY ECONOMICS: LESSON 6.1

8. Shortage Forces the Price Up • Shortage—at a given price, the amount by which quantity demanded exceeds quantity supplied. • As long as quantity demanded and quantity supplied differ, this difference forces a price change. CONTEMPORARY ECONOMICS: LESSON 6.1

9. Market Forces Lead to Equilibrium Price and Quantity • 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: LESSON 6.1

10. Market Exchange • Markets answer the questions • What to produce • How to produce it • For whom to produce it CONTEMPORARY ECONOMICS: LESSON 6.1

11. 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: LESSON 6.1

12. 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: LESSON 6.1

13. Markets Reduce Transaction Costs • Transaction costs—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: LESSON 6.1