Chapter 3

1 Consumers, business firms, government agencies, and foreigners participate in the marketplace by offering to buy or sell goods and services, or factors of production. Participation is motivated by the desire to maximize utility (consumers), profits (business firms), or the general welfare (government agencies).

2 All interactions in the marketplace involve the exchange of either factors of production or finished products. Although the actual exchanges can take place anywhere, we say that they take place in product markets or factor markets, depending on what is being exchanged.

3 People who are willing and able to buy a particular good at some price are part of the market demand for that product. All those who are willing and able to sell that good at some price are part of the market supply. Total market demand or supply is the sum of individual demands or supplies.

4 Supply and demand curves illustrate how the quantity demanded or supplied changes in response to a change in the price of that good. Demand curves slope downward; supply curves slope upward.

5 The determinants of market demand include the number of potential buyers and their respective tastes (desires), incomes, other goods, and expectations. If any of these determinants change, the demand curve shifts. Movements along a demand curve are induced only by a change in the price of that good.

6 The determinants of market supply include technology, factor costs, other goods, taxes, expectations, and the number of sellers. Supply shifts when these underlying determinants change.

7 The quantity of goods or resources actually exchanged in each market depends on the behavior of all buyers and sellers, as summarized in market supply and demand curves. At the point where the two curves intersect, an equilibrium pricethe price at which the quantity demanded equals the quantity suppliedwill be established.

8 A distinctive feature of the market equilibrium is that it is the only pricequantity combination that is acceptable to buyers and sellers alike. At higher prices, sellers supply more than buyers are willing to purchase (a market surplus); at lower prices, the amount demanded exceeds the quantity supplied (a market shortage). Only the equilibrium price clears the market.

9 Price ceilings and floors are disequilibrium prices imposed on the marketplace. Such price controls create an imbalance between quantities demanded and supplied.

10 The market mechanism is a device for establishing prices and product and resource flows. As such, it may be used to answer the basic economic questions of WHAT to produce, HOW to produce it, and FOR WHOM. Its apparent efficiency prompts the call for laissez fairea policy of government nonintervention in the marketplace.