CHAPTER 4 Equilibrium: Where Supply Meets Demand

After studying economics for a while, you will start to see supply and demand curves everywhere.

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Chapter Objective

Analyze how supply and demand determine the equilibrium price and quantity.

• 4.1 Understanding Markets

  Survey the central role that markets play in our society, determining what is produced, how, by whom, and who gets it.

• 4.2 Equilibrium

  Analyze how markets bring supply and demand into balance.

• 4.3 Predicting Market Changes

  Assess the consequences of shifts in demand and supply, and how changes in prices and quantities reveal whether demand or supply changed.

Scene one: Utter chaos. Traders on the floor of the New York Stock Exchange are packed in close to each other, raising their hands, shouting. Their eyes grow weary as they watch stock prices rise and fall. But even though they’re shouting, they aren’t fighting. Above the din, you hear someone yell: “I’ll buy five thou’ at four-forty.”

Scene two: An upscale coffee shop. The deep sofas look inviting. This looks like a nice place to relax and enjoy a latte or herbal tea, and so you walk in. The barista greets you with a warm smile and asks: “What will it be?”

Scene three: It’s 2 A.M., and you’re still awake. You’ve been searching for hours, and the web pages are starting to blur. But you know that if you persist, you’ll find an online store offering a great deal on the television you want.

Scene four: Justin Bieber’s right Yeezy, tossed into the audience during a concert, is up for auction on eBay. The first bid comes in around $7,000. There are five days left before the bidding ends, and the shoe will go to the highest bidder. That’s five days for you to consider how much of a belieber you are and whether you’d pay your right leg to own his right shoe.

These stories are all about the same thing: markets, the interaction of supply and demand. Buyers and sellers come together in a market, and your job in this chapter is to analyze how the forces of supply and demand interact in markets. The last two chapters have given you a solid foundation for assessing the choices that both buyers and sellers make. Our task now is to bring both sides together, embedding all of this within a complete supply-and-demand framework. It’s a valuable framework that’s essential for understanding the business world, and a whole lot more. You’ll use it to forecast what gets bought and sold, what the prices of various products will be, and how these outcomes change when economic conditions change. Indeed, it’s such a powerful framework that it’ll guide much of the rest of your study of economics.