Ingenieria

S U P P L Y D E M A N D M A R K E T S

A N D I : H O W W O R K

IN THIS CHAPTER YOU WILL . . .

Learn the nature of a competitive market

Examine what determines the demand for a good in a competitive market

THE

MARKET AND

FORCES

OF

Examine what determines the supply of a good in a competitive market

S U P P LY

DEMAND
See how supply and demand together set theprice of a good and the quantity sold

When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout the country. When the weather turns warm in New England every summer, the price of hotel rooms in the Caribbean plummets. When a war breaks out in the Middle East, the price of gasoline in the United States rises, and the price of a used Cadillac falls. What do theseevents have in common? They all show the workings of supply and demand. Supply and demand are the two words that economists use most often—and for good reason. Supply and demand are the forces that make market economies work. They determine the quantity of each good produced and the price at which it is sold. If you want to know how any event or policy will affect the economy, you must think firstabout how it will affect supply and demand. This chapter introduces the theory of supply and demand. It considers how buyers and sellers behave and how they interact with one another. It shows how
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Consider the key role of prices in allocating scarce resources in market economies

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PA R T T W O

S U P P LY A N D D E M A N D I : H O W M A R K E T S W O R K

supply and demand determineprices in a market economy and how prices, in turn, allocate the economy’s scarce resources.

MARKETS AND COMPETITION
The terms supply and demand refer to the behavior of people as they interact with one another in markets. A market is a group of buyers and sellers of a particular good or service. The buyers as a group determine the demand for the product, and the sellers as a group determinethe supply of the product. Before discussing how buyers and sellers behave, let’s first consider more fully what we mean by a “market” and the various types of markets we observe in the economy.

market a group of buyers and sellers of a particular good or service

COMPETITIVE MARKETS
Markets take many forms. Sometimes markets are highly organized, such as the markets for many agriculturalcommodities. In these markets, buyers and sellers meet at a specific time and place, where an auctioneer helps set prices and arrange sales. More often, markets are less organized. For example, consider the market for ice cream in a particular town. Buyers of ice cream do not meet together at any one time. The sellers of ice cream are in different locations and offer somewhat different products.There is no auctioneer calling out the price of ice cream. Each seller posts a price for an ice-cream cone, and each buyer decides how much ice cream to buy at each store. Even though it is not organized, the group of ice-cream buyers and ice-cream sellers forms a market. Each buyer knows that there are several sellers from which to choose, and each seller is aware that his product is similar to thatoffered by other sellers. The price of ice cream and the quantity of ice cream sold are not determined by any single buyer or seller. Rather, price and quantity are determined by all buyers and sellers as they interact in the marketplace. The market for ice cream, like most markets in the economy, is highly competitive. A competitive market is a market in which there are many buyers and manysellers so that each has a negligible impact on the market price. Each seller of ice cream has limited control over the price because other sellers are offering similar products. A seller has little reason to charge less than the going price, and if he or she charges more, buyers will make their purchases elsewhere. Similarly, no single buyer of ice cream can influence the price of ice cream because...