The Market Forces of Supply and Demand Supply and demand are the two words that economists use most often. Supply and demand are the forces that make market economies work. Modern microeconomics is about supply, demand, and market equilibrium
Elasticity . . . … is a measure of how much buyers and sellers respond to changes in market conditions … allows us to analyze supply and demand with greater precision
In a free, unregulated market system, market forces establish equilibrium prices and exchange quantities. While equilibrium conditions may be efficient, it may be true that not everyone is satisfied
Do the equilibrium price and quantity maximize the total welfare of buyers and sellers? Market equilibrium reflects the way markets allocate scarce resources. Whether the market allocation is desirable is determined by welfare economics
Market Efficiency - Market Failures Recall that: Adam Smith’s “invisible hand” of the marketplace leads selfinterested buyers and sellers in a market to maximize the total benefit that society can derive from a market
“The best things in life are free. . . ” Free goods provide a special challenge for economic analysis Most goods in our economy are allocated in markets… …for these goods, prices are the signals that guide the decisions of buyers and sellers