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

The Costs of Taxation How do taxes affect the economic well- being of market participants?

International Trade What determines whether a country imports or exports a good?

Market Efficiency - Market Failures Recall that: Adam Smith’s “invisible hand” of the marketplace leads self￾interested 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

The Law of Supply: uFirms are willing to produce and sell a greater quantity of a good when the price of the good is high. uThis results in a supply curve that slopes upward

The Meaning of Competition uA perfectly competitive market has the following characteristics: u There are many buyers and sellers in the market