Market Economics

Current Issues - LHS

Supply and Demand• Supply

– Reflects the amount of a product available to be purchased at a particular place

– UPWARD slope• Higher the price, the more

quantity of a product is available

• Lower the price, the less quantity of a product is available

– Suppliers produce more when prices are high b/c they make more money selling products at the higher price

Supply Curve

Supply and Demand• Demand– Reflects the desire for

a product at a particular price

– DOWNWARD slope• The higher the price the

less demand for a product

• The lower the price, the more demand for a product

– The higher the price, the lower the quantity someone buys

Demand Curve

Supply and Demand• Finding “equilibrium”

between supply and demand– Equilibrium = where

supply, demand curves intersect

– Means that the amount of goods being supplied is exactly the same as the amount of goods being demanded

– When this happens, everyone is happy! (unfortunately, it’s only theoretical)

Let’s Practice!

• What happens to demand if price goes UP?

• What happens to supply if price goes UP?

• What happens to demand if price goes DOWN?

• What happens to supply if price goes DOWN?

The Business Cycle

• Refers to shifts in the economy over time

• Measured by the growth rate of the Gross Domestic Product– GDP = total market

value of goods and services produced in a year

– Used as a common comparison point between countries

The Business Cycle• Expansion (increase in

production and prices)• Crisis (stock exchange

crash, b/k)• Recession (drops in

price, output)• Recovery (stocks

recover b/c price, incomes fall)

• Since WWII, business cycle has not been as extreme (gov’t use of fiscal, monetary policy to avoid worst effects)

Government Regulation & the Economy

• Two categories– Economic regulations

seek to control prices• Prevent monopolies

from gouging consumers

• Stabilize agricultural prices

– Anti-trust law strengthens market forces to avoid direct regulation• Prohibit practices that

lessen competition• Prevent mergers that

would limit competition

Government Regulation of the Economy

• Other bases of government regulation– Protecting public’s

health and safety– Maintain clean and

healthy environment– Preventing businesses

from failing• Bailouts, direct purchase

of business by government

• Nationalization of businesses: appropriate or not?

Deregulation

• Conservatives usually support fewer regulations on business

• They argue that regulations:– Interfere with free

enterprise– Increase costs of doing

business– Contribute to inflation

• Is deregulation appropriate or not?