20 1 Economic Thinking

Market
supply
Marginal benefits and costs measured in dollars curve

P2

P3

P1
Market
demand
curve
Q2 Q1 Q3
Quantity of good

Fig. 1.5 Market Supply, Demand, and Equilibrium

additional units. These consumers, who are represented along the demand curve up
and to the left of Q3, can be expected to bid the price up, just to obtain the quantity
they want.
As a result of the competitive bidding process, the suppliers can be induced to
expand their production from Q2 to Q1. Beyond Q1, the marginal cost of providing
an additional unit is greater than what any consumer is willing to pay for it. If one
producer refuses to expand production, the consumers can, since we are talking
about a competitive market, turn to other producers who may be in the market or
may be enticed into it by the higher price.
In a monopoly market, one in which there is only one producer of the good, the
consumers do not have the option of turning to another producer (i.e., competitor).
To that extent, the monopolist has control over the market: the monopolist can
restrict the number of units provided and thereby demand a higher price from the
consumer. By restricting output, the monopolist can reduce the total cost of
production and can receive greater revenues. (Can you explain why?)
Similarly, the number of units produced and consumed will adjust toward Ql if
the suppliers initially try to sell more than Ql at price P2. Suppose they try to offer
Q3 in Fig. 1.5. The only way they can justify doing that is to charge a price higher
than what consumers are willing to pay. Note that at Q3 the marginal cost of the last
unit is greater than the price the consumers are willing to pay for it. There will, as a
result, be more units offered (Q3) than will be purchased by consumers (Q2) at the
price (P2) required for suppliers to cover their marginal cost.