Demand, Supply, and The Market Process: Full Length Text - Micro Only Text - Macro Only Text

PRIVATE AND PUBLIC CHOICE
16TH EDITION
GWARTNEY – STROUP – SOBEL – MACPHERSON
Demand, Supply,
and the Market Process
Full Length Text — Part: 2 Chapter: 3
Micro Only Text — Part: 2 Chapter: 3
Macro Only Text — Part: 2 Chapter: 3
To Accompany: “Economics: Private and Public Choice, 16th ed.”

James Gwartney, Richard Stroup, Russell Sobel, & David Macpherson
Slides prepared by Joseph Connors with the assistance of Charles Skipton & James Gwartney
Copyright ©2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
Consumer Choice and
the Law of Demand
16th
edition
Gwartney-Stroup
Sobel-Macpherson
16th
edition
Economics and Your World Gwartney-Stroup

Sobel-Macpherson
• Your local grocery store is a

great place to see
economics in action.
Literally millions of
individuals from around the
world have been involved in
the process of getting these
goods to the shelves in just
the right quantities.
• Market prices, reflecting the forces of demand and
supply, coordinate their actions and bring their choices
into harmony.
16th
edition
Law of Demand Gwartney-Stroup

Sobel-Macpherson
• Law of Demand:
the inverse relationship between the price of a good and
the quantity consumers are willing to purchase.
• As the price of a good rises, consumers buy less.
• The availability of substitutes (goods that perform
similar functions) explains this negative relationship.
16th
edition
Market Demand Schedule Gwartney-Stroup

Sobel-Macpherson
• A market demand schedule shows the quantity of a good

people will demand at varying prices.
• Consider the market for pizza. A market demand
schedule lays out the quantity of pizzas demanded at
various prices.
• We can graph these points (the different prices and
respective quantities demanded) to make a demand
curve for pizzas.
16th
edition

Sobel-Macpherson
Quantity of Pizza
Price of (thousands per Price
Pizza month) 35
$ 35 4
$ 30 6 30
$ 25 8
25
$ 20 10
$ 15 12 20
$ 10 14
$ 5 16
15
10
• Note: While a straight line is Demand
used to depict the demand 5
curve here, there is no Quantity
(thousands
presumption that this will be 0 4 6 8 10 12 14 16 per month)
the case.
16th
edition

Sobel-Macpherson
Price
35
• Notice how the law of demand 30

is reflected by the shape of the
demand curve. 25
• As the price of a good rises
consumers buy less. 20
15
10
Demand
5
Quantity
(thousands
0 4 6 8 10 12 14 16 per month)
16th
edition

Sobel-Macpherson
Price
• The height of the demand 35
curve at any particular
quantity shows the maximum 30
price consumers are willing
to pay for that additional unit. 25
• Thus, the height of the curve
reflects the consumer’s 20
valuation of the marginal unit.
• For example, when 6 thousand 15
pizzas are consumed, the
value of the last pizza is $30. 10
Demand
5
Quantity
(thousands
0 4 6 8 10 12 14 16 per month)
16th
edition
Consumer Surplus Gwartney-Stroup

Sobel-Macpherson
• Consumer Surplus:
the area below the demand curve but above
the actual price paid.
• Consumer surplus is the difference between the
amount consumers are willing to pay and the amount
they have to pay for a good.
• Lower market prices increase the amount of consumer
surplus in the market.
16th
edition
Price and Quantity Purchased Gwartney-Stroup

Sobel-Macpherson
• Consider the market for pizzas. Price

Suppose the market price is $20.
• At $20 (the market price),
the 16 thousandth pizza will not be 35
purchased because the consumer
who demands it is only willing 30
to pay up to $5 for it.
• The 4 thousandth pizza will be
purchased because the consumer Market price = $20
20
who demands it is willing to pay
up to $35.
• The 10 thousandth pizza, and
those that precede it, will be 10
purchased because each of these
pizzas are valued as much or more 5
Demand
than the $20 market price. Quantity
(thousands
0 4 6 8 10 12 14 16 per month)
16th
edition
Consumer Surplus Gwartney-Stroup

Sobel-Macpherson
Price
• Consumer surplus is the difference

between what the consumer is Consumer
35 surplus
willing to pay and what they have
to pay. 30
• Buyers of the first 10 thousand
pizzas are willing to pay more than
$20. Market price = $20
20
• Hence, the area above the actual
price paid (the market price) and
below the demand curve
represents consumer surplus. 10
• Consumer surplus represents the
net gains to buyers from the 5
Demand
purchases. Quantity
(thousands
0 4 6 8 10 12 14 16 per month)
16th
edition
Elastic and Inelastic Demand Curves Gwartney-Stroup

Sobel-Macpherson
• Elastic demand
• A change in price leads to a relatively large change in
quantity demanded.
• Demand will be elastic when close substitutes for the
good are readily available.
• Inelastic demand
• A change in price leads to a relatively small change in
quantity demanded.
• Demand will be inelastic when few, if any, close
substitutes are available.
16th
edition
Elastic and Inelastic Demand Curves Gwartney-Stroup

Sobel-Macpherson
• When the market price for gasoline Price

Gasoline
increases from $2 to $4 a gallon, $4 market
the quantity demanded in the
market falls relatively little from 10
to 8 million units per week. $2
• In contrast, when the market price D
for tacos rises from $2 to $4, the Quantity
quantity demanded in the market (gasoline)
falls sharply from 10 to 4 million 8 10
units per week.
Price
• Because the quantity demanded Taco
$4 market
for tacos is highly sensitive to price
changes, the demand for tacos is
elastic. $2
• Because the quantity demanded of D
gas is largely insensitive to price
changes, the demand for gasoline Quantity
(tacos)
is inelastic. 4 10
16th
edition
Questions for Thought: Gwartney-Stroup

Sobel-Macpherson
1.(a) Are prices an accurate reflection of a good’s total

value? Are prices an accurate reflection of a good’s
marginal value? What is the difference?
(b) Consider diamonds and water. Which of these goods
provides the most total value? Which provides the
most marginal value?
Changes in Demand versus
Changes in Quantity Demanded
16th
edition
Gwartney-Stroup
Sobel-Macpherson
Changes in Demand 16th
edition
and Quantity Demanded Gwartney-Stroup
Sobel-Macpherson
• Change in Demand
– a shift in the entire demand curve.
• Change in Quantity Demanded
– a movement along the same demand curve in response
to a change in its price.
16th
edition
An Increase in Demand Gwartney-Stroup

Sobel-Macpherson
Price
(dollars)
• If tablet computers cost $300 each,
the demand curve for DVDs, D1,
300
indicates that Q1 units will be
demanded.
• If the price of tablet computers falls
to $100, the quantity demanded will
increase to Q2 units (where Q2 > Q1). 200
• Several factors will change the
demand for the good (shift the
entire demand curve).
• As an example, suppose consumer 100
income increases. The demand for
tablet computers at all prices will D1 D2
increase.
• After the shift of demand, Q3 units Quantity
are demanded at $100 instead of Q2 Q1 Q2 Q3 (tablet computers
per month)
(Q3 > Q2 > Q1).
16th
edition
A Decrease in Demand Gwartney-Stroup

Sobel-Macpherson
Price
(dollars)
• If a pizza costs $20, then the demand
curve for pizzas, D1, indicates that
200 units will be demanded. 20
• If the price falls to $10, the quantity
demanded of pizzas will increase to
300 units.
• If the number of pizza consumers
changes, then the demand for it will
generally change.
10
• For example, in a college town
during the summer students go
home and the demand for pizzas at
all prices decreases. D2
D1
• After the shift of demand, 200 units
are demanded at $10. Quantity
0 200 300 (Pizzas
per week)
16th
edition
Demand Curve Shifters Gwartney-Stroup

Sobel-Macpherson
• The following will lead to a change in demand

(a shift in the entire curve):
• Changes in consumer income
• Change in the number of consumers
• Change in the price of a related good
• Changes in expectations
• Demographic changes
• Changes in consumer tastes and preferences
16th
edition
Sobel-Macpherson
1. Which of the following do you think would lead to an

increase in the demand for beef:
(a) higher pork prices,
(b) higher incomes,
(c) higher grain prices used to feed cows,
(d) a scientific study linking high beef consumption
with cancer,
(e) an increase in the price of beef?
2. What is being held constant when a demand curve for a
product (like shoes or apples) is constructed? Explain why
the demand curve for a product slopes downward and to
the right.
Producer Choice and
the Law of Supply
16th
edition
Gwartney-Stroup
Sobel-Macpherson
16th
edition
Cost and the Output of Producers Gwartney-Stroup
Sobel-Macpherson
• Producers purchase resources and use them to produce

output.
• Producers will incur costs as they bid resources away
from their alternative uses.
• Opportunity cost of production:
The sum of the producer’s costs of employing each
resource required to produce the good.
• Firms will not stay in business for long unless they are
able to cover the cost of all resources employed,
including the opportunity cost of the resources owned
by the firm.
16th
edition
Economic and Accounting Cost Gwartney-Stroup
Sobel-Macpherson
• Economic Cost
– the cost of all resources used to produce the good.
• Accounting Cost
– often ignores the opportunity costs of resources owned
by the firm (for example, the firm’s equity capital).
Keys to Prosperity: 16th
edition
Role of Profits and Losses

Gwartney-Stroup
Sobel-Macpherson
• Profit occurs when a firm’s revenues

exceed its costs.
• Firms supplying goods for which
consumers are willing to pay more
• than the opportunity cost of the resources required to
produce the good will make a profit.
• Firms making profits will expand, while those making
losses will contract.
• Profits are a reward for producing products that are
valued more than the resources required for their
production.
• Losses are a penalty imposed on firms that use
resources in ways that reduce their market value.
16th
edition
Law of Supply Gwartney-Stroup

Sobel-Macpherson
• Law of Supply:
there is a positive relationship between the price of a
product and the amount of it that will be supplied.
• As the price of a product rises, producers will be
willing to supply a larger quantity.
16th
edition
Market Supply Schedule Gwartney-Stroup

Sobel-Macpherson
Quantity of Price
Pizza Supply
35
Price of (thousands
Pizza per month)
30
$ 5 4.0
$ 10 5.3 25
$ 15 6.7
20
$ 20 8.0
$ 25 9.3
15
$ 30 10.7
$ 35 12.0 10
5
Quantity
(thousands
0 4 6 8 10 12 14 16 per month)
16th
edition

Sobel-Macpherson
Quantity of Price
Pizza Supply
35
Price of (thousands
Pizza per month)
30
$ 5 4.0
$ 10 5.3 25
$ 15 6.7
20
$ 20 8.0
$ 25 9.3
15
$ 30 10.7
$ 35 12.0 10
5
Quantity
(thousands
0 4 6 8 10 12 14 16 per month)
16th
edition

Sobel-Macpherson
Price
Supply
35
• Notice how the law of supply 30

is reflected by the shape of
the supply curve. 25
• As the price of a good rises
producers supply more. 20
15
10
5
Quantity
(thousands
0 4 6 8 10 12 14 16 per month)
16th
edition

Sobel-Macpherson
Price
• The height of the supply curve at Supply
35
any quantity shows the minimum
price necessary to induce
producers to supply that unit. 30
• The height of the supply curve
at any quantity also shows the 25
opportunity cost of producing
that unit. 20
• Here, producers require $15
to induce them to supply the 15
6.7 thousandth unit while they
would require $25 to supply 10
the 9.3 thousandth unit.
5
Quantity
(thousands
0 4 6 8 10 12 14 16 per month)
16th
edition
Price and Quantity Supplied Gwartney-Stroup

Sobel-Macpherson
• Consider the market for pizzas.

Suppose the market price is $20. Price
Supply
• The 12 thousandth unit will not 35
be produced as the cost of
supplying it ($35) exceeds the
market price.
• The 4 thousandth unit will be
produced because the cost of Market price = $20
20
supplying it ($5) is less than the
market price of $20.
• The 8 thousandth unit, and all
those that precede it, will be
produced as the cost of supplying
5
them is equal to or less than the
market price. Quantity
(thousands
0 4 6 8 10 12 per month)
16th
edition
Producer Surplus Gwartney-Stroup
Sobel-Macpherson
• Producer surplus is the difference Price

between the lowest price a (monthly bill) Supply
35
supplier will accept to produce
the good (the opportunity cost of
the resources) and the price they
actually get (the market price).
• Producers are willing to supply Market price = $100
the first 8 thousand pizzas for less 20
than $20.
• Hence, the area above the supply
curve but below the actual
market price represents producer Producer
surplus. surplus
5
• Producer surplus represents the Quantity
net gains to producers (including (thousands
0 4 6 8 10 12 per month)
resource suppliers) from the
sales.
16th
edition
Elastic and Inelastic Supply Curves Gwartney-Stroup
Sobel-Macpherson
• Elastic supply
• Quantity supplied is relatively sensitive to changes in
price.
• Thus, a change in price leads to a relatively large
change in quantity supplied.
• Inelastic supply
• Quantity supplied is not very sensitive to changes in
price.
• Thus, a change in price leads to only a relatively small
change in quantity supplied.
16th
edition
Elastic and Inelastic Supply Curves Gwartney-Stroup

Sobel-Macpherson
• When the market price for soft Price

Soft drink
drinks increases from $1.00 to market
$1.50 a six-pack, the quantity $1.50 S
supplied to the market rises from
$1.00
100 to 200 million units per week.
• When the market price for
physician services rises from $100 Quantity
(million .
to $150 an office visit, the 50 100 150 200 6-packs)
quantity supplied rises from 10 to
12 million visits per week. Price Physician
• Because soft drink supply is quite
S Services
market
sensitive to price changes, its $150
supply is elastic. $100
• Because the supply of physician
services is relatively insensitive to
Quantity
changes in price, its supply is (million.
inelastic. 10 12 visits)
16th
edition

Sobel-Macpherson
1. (a) What is being held constant when the supply curve

for a specific good like pizza or cars is constructed?
(b) Why does the supply curve for a good slope upward
and to the right?
2. What is producer surplus? Is producer surplus basically
the same thing as profit?
3. What must an entrepreneur do in order to earn a profit?
How do the actions of firms earning a profit influence
the value of resources? What happens to the value of
resources when losses are present?
16th
edition

Sobel-Macpherson
4. What does the cost of a good or service reflect?

Will producers continue to supply a good or service
if consumers are unwilling to pay a price sufficient to
cover the cost?
5. Suppose you decide that it is in your self-interest to
establish a computer repair business. Will others be
better off or worse off if your business earns a profit?
How will the well-being of your customers be affected?
Changes in Supply versus
Changes in Quantity Supplied
16th
edition
Gwartney-Stroup
Sobel-Macpherson
Changes in Supply 16th
edition
and Quantity Supplied Gwartney-Stroup

Sobel-Macpherson
• Change in Supply
– a shift in the entire supply curve.
• Change in Quantity Supplied
– movement along the same supply curve in response
to a change in its price.
16th
edition
A Decrease in Supply Gwartney-Stroup
Sobel-Macpherson
Price
• If the market price for gasoline is $3.00 (dollars) S2 S1
a gallon, the supply curve for gasoline
S1 indicates Q1 units would be supplied. $3
• If the price fell to $2.00, the quantity
supplied would fall to Q2 units (where
Q2 < Q1).
• If, somehow, the opportunity costs for $2
gasoline producers changed then the
supply of gas would change.
• Consider the case where the cost of
crude oil (an input in the production of $1
gasoline) increases the supply of
gasoline at all potential market prices
would fall. Now at $2.00, Q3 units are
Quantity
supplied instead of Q2 (Q3 < Q2 < Q1). (units of
Q3 Q2 Q1 gasoline
per year)
16th
edition
Supply Curve Shifters Gwartney-Stroup

Sobel-Macpherson
• The following will cause a change in supply

(a shift in the entire curve):
• Changes in resource prices
• Changes in technology
• Elements of nature and political disruptions
• Changes in taxes
How Market Prices
are Determined
16th
edition
Gwartney-Stroup
Sobel-Macpherson
16th
edition
Market Equilibrium Gwartney-Stroup

Sobel-Macpherson
• This table & graph indicate demand & supply Price ($) S
conditions of the market for calculators.
• Equilibrium will occur where the quantity demanded 13
equals the quantity supplied. If the price in the 12
market differs from the equilibrium level, market 11
forces will guide it to equilibrium. 10
• A price of $12 in this market will result in a quantity 9
demanded of 450 …and a quantity supplied of 600 … 8
D
resulting in an excess supply. 7
• With an excess supply present, there will be
downward pressure on price to clear the market.
Quantity
450 500 550 600 650
Quantity Quantity Condition Direction
Price supplied demanded in the of pressure
(dollars) (per day) (per day) market on price
Quantity supplied
12 600 > 450
Excess
supply Downward
= 600
Quantity demanded
10 550 550 = 450
8 500 650
16th
edition

Sobel-Macpherson
Price ($) S
• A price of $8 in this market will result in a quantity
supplied of 500 … and quantity demanded of 650 … 13
resulting in an excess demand. 12
• With an excess demand present, there will be 11
upward pressure on price to clear the market. 10
9
8
7
D
Quantity
450 500 550 600 650
Quantity demanded
12 600 > 450
Excess
supply Downward
= 650
Quantity supplied
10 550 550 = 500
8 500 < 650 Excess

demand Upward
16th
edition

Sobel-Macpherson
Price ($) S
• A price of $10 in this market results in quantity
supplied of 550 … and a quantity demanded of 550 … 13
resulting in market balance. 12
• When the market is in balance, there will be an 11
equilibrium present and the market will clear. 10
9
8
7
D
Quantity
450 500 550 600 650
Quantity supplied
12 600 > 450
Excess Downward
supply
= 550
Market
10 550 = 550 Balance Equilibrium Quantity demanded
= 550
8 500 < 650 Excess
demand Upward
16th
edition

Sobel-Macpherson
Price ($) S
• At every price above market equilibrium there is
excess supply and there will be downward pressure Excess
13 supply
on the price level.
12
• At every price below market equilibrium there is 11 Equilibrium
excess demand and there will be upward pressure 10 price
on the price level. 9
• At the equilibrium price, quantity demanded and 8
quantity supplied are in balance. 7 Excess D
demand
Quantity
450 500 550 600 650
12 600 > 450

Excess Downward
supply
Market
10 550 = 550 Balance Equilibrium
8 500 < 650 Excess
demand Upward
16th
edition
Net Gains to Buyers and Sellers Gwartney-Stroup
Sobel-Macpherson
• Let’s return to the market for Price

calculators. When the market is in Supply
equilibrium – where quantity Net gains to
14 buyers and
supplied just equals quantity sellers
demanded – price equals $10.
• Recall that the area above the 12
market price and below the
demand curve is called consumer Market price = $10
surplus and that the area above the 10
supply curve but below the market Equilibrium
price is called producer surplus.
Together, these two areas 8
represent the net gains to
consumers and producers of the
product. 6
Demand
• When equilibrium is present, all of
the potential gains from production Quantity
0 450 550 650
and exchange are realized.
16th
edition
Equilibrium and Efficiency Gwartney-Stroup

Sobel-Macpherson
Price
• It is economically efficient to Supply
undertake actions when the 14
benefits of doing so exceed the
costs.
12
• What is the consumer’s valuation
of the 450th unit of calculators
brought to market? 10
• What is the opportunity cost of
delivering the 450th unit to
market? 8
• Does it make sense, from an
economic efficiency standpoint, 6
to use resources to supply this Demand
unit?
Quantity
0 450 550 650
16th
edition

Sobel-Macpherson
Price
(monthly bill)
Supply
14
• What is the consumer’s valuation
of the 650th unit of calculators
brought to market? 12
• What is the opportunity cost of
delivering the 650th unit to
market? 10
• Does it make sense, from an
economic efficiency standpoint,
to use resources to supply this 8
unit?
6
Demand
Quantity
0 450 550 650
16th
edition
Sobel-Macpherson
Price
Supply
• At the equilibrium output level 14
(the 550th unit), the consumer’s
valuation of the marginal unit and
the producer’s opportunity cost 12
of the resources necessary to
bring that unit to market are
equal. 10
• In equilibrium all units valued
more than their costs are
8
produced and the potential gains
from production and exchange
are maximized. This outcome is 6
economically efficient. Demand
Quantity
0 450 550 650
16th
edition

Sobel-Macpherson
1. How is the market price of a good determined? When

the market for a good is in equilibrium, how will the
consumers’ evaluation of the marginal unit compare
with the opportunity cost of producing the unit? Is the
equilibrium price consistent with economic efficiency?
How Markets Respond to
Changes in Demand & Supply
16th
edition
Gwartney-Stroup
Sobel-Macpherson
16th
edition
Effects of a Change in Demand Gwartney-Stroup

Sobel-Macpherson
• When demand decreases

– the equilibrium price and quantity will fall.
• When demand increases
– the equilibrium price and quantity will rise.
Market Adjustment to 16th
edition
an Increase in Demand Gwartney-Stroup
Sobel-Macpherson
• Consider the market for eggs. Price

($ per doz)
• Prior to the Easter season, the market S
for eggs produces an equilibrium
where quantity supplied equals
quantity demanded at a price of $1.60 2.40
a dozen & output of Q1.
• Every year during the Easter holiday
the demand for eggs increases (shifts 2.00
from D1 to D2).
• What happens to the equilibrium price
and output level? 1.60
• Now at $1.60, quantity demanded D2
exceeds quantity supplied. An upward
pressure on price induces existing 1.20
suppliers to increase their quantity D1
supplied. Equilibrium now occurs at
output level Q2 and price $2.00. Quantity
Q1 Q2 (million doz
• What do you think will happen to price eggs per week)
and output after the Easter holiday?
16th
edition
Effects of a Change in Supply Gwartney-Stroup
Sobel-Macpherson
• When supply decreases

– the equilibrium price will rise and the equilibrium
quantity will fall.
• When supply increases
– the equilibrium price will fall and the equilibrium
quantity will rise.
Market Adjustment to 16th
edition
a Decrease in Supply Gwartney-Stroup

Sobel-Macpherson
• Consider the market for lemons. Price S2

($ per lemon)
• Initially equilibrium is present where S1
quantity demanded equals quantity
supplied at a market
price of $0.20 and output of Q1. 0.40
• Suppose adverse weather reduces the
supply of lemons (shift from S1 to S2).
• What happens to both the price and 0.30
output level in the market?
• Now at $0.20, quantity demanded
exceeds quantity supplied. Upward 0.20
pressure on price reduces quantity
demanded by consumers. Equilibrium
now occurs at a price of $0.30 and 0.10
output level of Q2. D
• What do you think will happen to the
price and output of lemons when Quantity
weather returns to normal? Q2 Q1 (millions of
lemons per week)
16th
edition

Sobel-Macpherson
1. How has the availability and growing popularity of online

music stores (like Apple’s iTunes) affected the market for
music CDs purchased from brick-and-mortar stores like
Target or Wal-Mart? Use the tools of demand and supply
to illustrate.
2. How have technological advances in miniature batteries
and lower computer chip prices affected the market for
smart phones? Use the tools of demand and supply to
illustrate.
The Invisible Hand Principle
16th
edition
Gwartney-Stroup
Sobel-Macpherson
16th
edition
Keys to Prosperity: The Invisible Hand Gwartney-Stroup
Sobel-Macpherson
• Invisible hand:
the tendency of market prices to direct
individuals pursuing their own self
interests into productive activities that
• also promote the economic well-being of society.
• This direction, provided by markets, is a key to economic
progress.
16th
edition
The Invisible Hand Gwartney-Stroup

Sobel-Macpherson
• Adam Smith highlights the role of self interest and the

invisible hand of market forces in the following passage.
“ Every individual is continually exerting himself to find out the

most advantageous employment for whatever capital [income]
he can command. It is his own advantage, indeed, and not
that of the society which he has in view. But the study of his
own advantage naturally, or rather necessarily, leads him to
prefer that employment which is most advantageous to
society… He intends only his own gain, and he is in this, as in
many other cases, led by an invisible hand to promote an end
which was not part of his intention.”
– Adam Smith, The Wealth of Nations (1776)
16th
edition
Communicating Information Gwartney-Stroup
Sobel-Macpherson
• Product prices communicate up-to-date information

about the consumers’ valuation of additional units of
each commodity.
• Without the information provided by market prices it
would be impossible for decision-makers to determine
how intensely a good was desired relative to its
opportunity cost.
Coordinating Actions 16th
edition
of Market Participants Gwartney-Stroup
Sobel-Macpherson
• Price changes coordinate the choices of buyers and

sellers and bring them into harmony.
• Price changes create profits and losses which direct
producers toward the production of goods and services
that are valued most highly relative to cost.
16th
edition
Motivating Economic Participants Gwartney-Stroup
Sobel-Macpherson
• Suppliers have an incentive to produce efficiently

(at a low cost).
• Entrepreneurs have an incentive to both innovate and
produce goods that are highly valued relative to cost.
• Resource owners have an incentive both to develop and
supply resources that producers value highly.
16th
edition
Market Order Gwartney-Stroup
Sobel-Macpherson
• Competitive markets – the forces of supply and demand

– lead to market order, low-cost production, and
economic progress.
• One statistic—the current market price of a particular
good or service—provides buyers and sellers with what
they need to bring their actions into harmony with the
best possible information on the current actions and
preferences of others.
• The pricing system coordinates the choices of literally
millions of consumers, producers, and resource
owners and thereby provides market order.
• The process works so automatically that it is often
taken for granted. Hence, the term “invisible hand.”
16th
edition
Qualifications Gwartney-Stroup
Sobel-Macpherson
• The efficiency of market organization is dependent upon:

• The presence of competitive markets.
• Well-defined and enforced private property rights.
16th
edition
Sobel-Macpherson
1. Consider a large business firm like Wal-Mart. Does it

need to be regulated in order to assure that it produces
efficiently? Is regulation needed to assure that it will
supply the goods and services that consumers want?
2. How can you explain that the quantities of milk, bananas,
candy bars, televisions, notebook paper and thousands
of other items available in your hometown are
approximately equal to the quantities of these items that
local consumers desire to purchase?
16th
edition
Sobel-Macpherson
3. What is the invisible hand principle? Does it indicate that

“good intentions” are necessary if one’s actions are going
to be beneficial to others? What are the necessary
conditions for the invisible hand to work well? Why are
these conditions important?
4. “The output generated by our economy should not be
left to chance. We need to have someone in charge who
will make sure that resources are used wisely.”
(a) When resources and goods are allocated by markets,
is the output “left to chance?”
(b) In a market economy, what determines whether or
not a good will be produced?
End of
Chapter 3

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PRIVATE AND PUBLIC CHOICE

GWARTNEY – STROUP – SOBEL – MACPHERSON

To Accompany: “Economics: Private and Public Choice, 16th ed.”

Economics and Your World Gwartney-Stroup

• Your local grocery store is a

Law of Demand Gwartney-Stroup

Market Demand Schedule Gwartney-Stroup

• A market demand schedule shows the quantity of a good

Market Demand Schedule Gwartney-Stroup

Market Demand Schedule Gwartney-Stroup

• Notice how the law of demand 30

Market Demand Schedule Gwartney-Stroup

Consumer Surplus Gwartney-Stroup

Price and Quantity Purchased Gwartney-Stroup

• Consider the market for pizzas. Price

Consumer Surplus Gwartney-Stroup

• Consumer surplus is the difference

Elastic and Inelastic Demand Curves Gwartney-Stroup

Elastic and Inelastic Demand Curves Gwartney-Stroup

• When the market price for gasoline Price

Questions for Thought: Gwartney-Stroup

1.(a) Are prices an accurate reflection of a good’s total

An Increase in Demand Gwartney-Stroup

A Decrease in Demand Gwartney-Stroup

Demand Curve Shifters Gwartney-Stroup

• The following will lead to a change in demand

1. Which of the following do you think would lead to an

• Producers purchase resources and use them to produce

Role of Profits and Losses

• Profit occurs when a firm’s revenues

Law of Supply Gwartney-Stroup

Market Supply Schedule Gwartney-Stroup

Market Supply Schedule Gwartney-Stroup

Market Supply Schedule Gwartney-Stroup

• Notice how the law of supply 30

Market Supply Schedule Gwartney-Stroup

Price and Quantity Supplied Gwartney-Stroup

• Consider the market for pizzas.

• Producer surplus is the difference Price

Elastic and Inelastic Supply Curves Gwartney-Stroup

• When the market price for soft Price

Questions for Thought: Gwartney-Stroup

1. (a) What is being held constant when the supply curve

Questions for Thought: Gwartney-Stroup

4. What does the cost of a good or service reflect?

and Quantity Supplied Gwartney-Stroup

Supply Curve Shifters Gwartney-Stroup

• The following will cause a change in supply

Market Equilibrium Gwartney-Stroup

Market Equilibrium Gwartney-Stroup

8 500 < 650 Excess

Market Equilibrium Gwartney-Stroup

Market Equilibrium Gwartney-Stroup

12 600 > 450

• Let’s return to the market for Price

Equilibrium and Efficiency Gwartney-Stroup

Equilibrium and Efficiency Gwartney-Stroup

Questions for Thought: Gwartney-Stroup

1. How is the market price of a good determined? When

Effects of a Change in Demand Gwartney-Stroup

• When demand decreases

• Consider the market for eggs. Price

• When supply decreases