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SUPPLY AND DEMAND

WHAT IS THIS CHAPTER ALL ABOUT?

This chapter introduces market behavior and the intricacies of the market mechanism. It is helpful to continue to answer the basic questions of WHAT, HOW, and FOR WHOM and to briefly outline how the market system answers them.

The chapter focuses on the allocative and distributive functions of the price system. The section on disequilibrium pricing -- price ceilings and floors -- provides an opportunity to illustrate the upside and downside of interference with market pricing mechanisms.

The opening illustration of a kidney sale on eBay demonstrates the power and potential problems of markets.

This introduction sets the general direction of this chapter, which is to look at how the market system answers the following questions:

1. What determines the price of a good or a service?

2. How does the price of a product affect its production and consumption?

3. Why do prices and production levels often change?

NEW TO THIS EDITION

• New headline on campus drinking • New headline on demand shifts for natural gas • One new question for discussion • One new problem

LECTURE LAUNCHERS

Where should you start?

Supply and Demand analysis is the foundation of much of the analysis the student will perform during the semester. Therefore, it is important that students get a good start with this material.

1. Begin your discussion by identifying market participants are, that is the suppliers and the demanders.

Students sometimes confuse the colloquial use of the term “market” as in a supermarket with its use by economics.

2. Follow this discussion with the concept factor and product markets.

Showing the students how the market participants interact in the circular flow helps illustrate the interaction of

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