APPLIED ECONOMICS

Market Equilibrium
-when the quantity consumers are willing and able to buy equals
the quantity producers are willing and able to sell
- the independent plans of buyers and sellers exactly match, and
there is no incentive for change.
A Surplus Forces the Price Down
Surplus- excess quantity supplied
A Shortage Forces the Price Up
Shortage- excess quantity demanded
- Thus, surplus puts downward pressure on the
price, and a shortage puts upward pressure.
Market Forces Lead to Equilibrium
Equilibrium Price- equates quantity demanded with quantity
supplied. It is also called Market-clearing price.
The independent decisions of many individual buyers and many
individuals sellers cause the price to reach equilibrium in
competitive markets.
ADAM’S SMITH INVISIBLE HAND
It is voluntary choices of many buyers and sellers responding only
to their individual incentives.
Market Exchange Is Voluntary
Market Exchange- is a voluntary activity in which both sides of the
market expect to benefit and usually do.
Market Prices- serve as signals to buyers and sellers about the
relative scarcity of the good.
Market Reduce Transaction Costs
Transaction costs- cost of time and information needed to carry out
market exchange. The higher the transaction cost, less likely it is
that an exchange takes place.

SHIFTS OF DEMAND AND SUPPLY CURVE

Increase in demand- consumers are now willing and able to buy
more of the product at every price. As long as the supply curve
slopes upward, a rightward shift of the demand curve increases
both price and quantity.
Decrease in Demand- consumers are now willing and able to buy
less of the product at every price. As long as the supply curve slopes
upward, a leftward shift of the demand curve reduces both price
and quantity.
An Increase in Supply- produces are willing and able to supply
more pizza at each price. As long as demand curve slopes
downward, a rightward shift of the supply curve reduces price but
increases quantity.
A demand in Supply- produces are willing and able to supply less
pizza at each price. As long as the demand curve slopes downward,
a leftward shift of the supply curve increase price but reduces
quantity.
MARKET EFFICIENCY AND THE GAINS FROM EXCHANGE
Demand and supply are the foundations of the market economy.
Market forces naturally occur without central coordination.
Competition and Efficiency
To judge market performance, economist employ two measures of
efficiency.
 Productive efficiency- refers to producing output at the lowest
possible cost. (making stuff right)
 Allocative efficiency- refers to producing goods that consumers
value the most. (making the right stuff)
 There is allocative efficiency when…
marginal benefit that the consumers derived from a good= marginal
cost of producing the good
Competition
-ensures that firms produce at the lowest possible cost per unit
(productive efficiency)
-encourages producers to supply more of what consumers value the
most (allocative efficiency)
Productive Efficiency- occurs when a firm produces at the lowest
possible cost per unit. Competition ensure that firms produce at the
lowest possible cost per unit.
ALLOCATIVE EFFICIENCY: MAKING THE RIGHT STUFF
Producing at the lowest possible cost per unit is no guarantee
that firms are producing what consumers most prefer.
Allocative Efficiency- occurs when firms produce the output that is
most valued by costumers.
The demand curve reflects the marginal benefit that consumers
attach to each unit of the good.
Market Price- the amount of money people are willing and able to
pay for the final unit they purchase.
Equilibrium price- equals the marginal cost of supplying the final
unit sold.
Marginal Cost- measures the opportunity cost of resources
employed by the firm to produce that final unit sold.
As long as marginal benefit equals marginal cost, that last unit
purchased is worth as much as, more than, any other good that
could have been produced using those some resources.
When the marginal benefit that consumers derive from a good equal
the marginal cost of producing that good, that market is said to be
allocatively efficient.
Demand Curve (customers) = marginal benefit
Supply Curve (firm) = marginal cost
Marginal Benefit= Marginal Cost
-Allocative Efficiency
Disequilibrium- a temporary condition when the plans of buyers do
not match the plans of sellers.
A surplus of goods exerts downward pressure on price, and a
shortage of goods exerts upward pressure.
-A mismatch between quantity demanded and quantity supplied as
the market seeks equilibrium; usually temporary, except when
government intervenes to set the price.
Government intervention in the market is one of the source of
disequilibrium
Price Floor- is a minimum legal price. To have an impact, the price
floor must be set above the equilibrium price. Price floors distort
market and reduce economic welfare. ( agricultural products)
Price Ceiling- a maximum legal selling price above which a product
cannot be sold.
-Sometimes public officials try to keep a price below the
equilibrium level by establishing price ceiling or maximum legal
price.
Price= independent variable
Consumer Surplus- difference between the most that consumers
would be willing and able to buy for a given quantity and the
amount they actually do pay.
As the price decreases, consumer surplus increases
COMPARATIVE ADVANTAGE AND SPECIALIZATION
Comparative Advantage- ano pang pwedeng magawa based on
opportunity cost
Absolute- sino ang gumagamit ng pinakamunting resources
Absolute Advantage- means being able to produce something using
fewer resources that other producers require.
Law- sino ang dapat gumawa
The Law of Comparative Advantage/ Competitive Advantage
Absolute advantage is not the best guide for deciding who
should do what. The best guide is comparative advantage.
According to the law of comparative advantage, the worker with
the lower opportunity cost of then, occurs when individual workers
focus on single tasks, enabling each worker to become more
efficient and productive.
The term worker may be replaced by the terms firm, region or
country.
Gains from Specialization
Specialization- occurs when individual workers focus on single
tasks, enabling each worker to become more efficient and
productive
Absolute advantage- focuses on which of you uses the fewest
resources
Comparative advantage – focuses what else those resources could
have productive – that is on the opportunity cost of those resources.
The law of comparative advantage indicates who should do what.
Exchange
Barter- a system of exchange in which products are traded directly
for other products. Barter works best in simple economies that have
little specialization have little specialization and few types of goods
to trade.
Money- coins, bills, and checking- serves as a medium of exchange
because it is the one thing that everyone is willing to accept in
exchange for all goods in exchange for all goods and services.
Specialization
Because of specialization based on comparative advantage, most
people consumer little of what they produce and produce little of
what they consume. Specialization and exchange create more
interdependence in an economy.
The degree of specialization is perhaps most obvious online, where
the pool of potential customers is so vast that individual sites
become sharply focused, from tattoos to pet clothes.
Division of Labor
Division of labor -organizes the production process so that each
worker specializes in a separate risk.
a) Takes advantage of individual preferences and natural abilities
b) Allows workers to gain experience at a particular task
c) Reduces the need to shift between different tasks
d) Permits the introduction of labor-saving machinery