The Meaning of Economics 19

Supply curve

Marginal benefits and costs measured in dollars

MC2

MB1

MB2
MC1
Demand curve

Q2 Q1 Q3
Quatity of good

Fig. 1.4 Supply and Demand Curves

marginal cost is greater than the marginal benefit. For example, for the unit
consumed at Q3, the marginal cost is MC2 while the marginal benefit is less, MB2.
Implicitly, we have assumed the maximizing person is trading with himself,
giving up units of one thing for more units of another. Quite often, however, people
find that it is less costly to trade with someone else than to produce the good
themselves. To understand a social setting in which there are many producers and
consumers trading for a particular good, we need to construct a model involving a
market supply curve and market demand curve. We can derive a market supply
curve by adding together what all producers are willing to offer on the market at
each possible price. If each individual producer is willing to offer a larger quantity
at higher prices, the market supply curve, like the individuals’ supply curves, will
be upward sloping.8 To obtain the market demand curve, we can add the amounts
demanded by all the consumers at each and every price. Since the individuals’
demand curves are downward sloping, the same will be true of the market demand
curve. The market supply and demand curves are depicted in Fig. 1.5. The
quantities involved in this graph are much greater than in Fig. 1.4.
In a highly competitive market situation—one in which many consumers have
many sources for obtaining a given good—we will still expect the market to offer
that quantity of the good (Q1) that is at the intersection of the market supply and
market demand curves. The simple reason is that if the price is P1 and if only Q2
units (which is fewer than Q1) are provided on the market, there will be many more
units demanded (Q3) than will be available (Q2). Also note that there are consumers
who are willing to offer the producers a price that exceeds the P1 of producing the