PART TWO

How Markets Work

3
After studying this chapter, you will be able to:
• Explain the influences on demand • Explain the influences on supply

Demand and Supply

• Describe a competitive market and think about a price as an opportunity cost

• Explain how demand and supply determine prices and quantities bought and sold • Use the demand and supply model to make predictions about changes in prices and quantities

What makes the prices of oil and gasoline double in just one year? Will these prices keep on rising? Are the oil companies taking advantage of people? This chapter enables you to answer these and similar questions about prices-prices rise, prices that fall, and prices that fluctuate. You already know that economics is about the choices people make to cope with scarcity and how those choices helps us to answer the big economic question: What, and for whom are goods and services produced? how, It also that

respond to incentives. Prices act as incentives. You're going to see how people respond to prices and how prices get determined by demand and supply. The demand and supply model that you study in this chapter is the main tool of economics. It

helps us to say more about what it takes for the pursuit of self-interest to promote the social interest. In Reading

Between

the Lines at the end of the chapter, we'll examine

the recent surge in the price of rice across Asia.

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CHAPTER 3 Demand and Supply

Markets and Prices
When you need a new pair of running shoes, want a bagel and a lane, plan to upgrade your cell phone, or need to fly home for Thanksgiving, you must find a place where people sell those items or offer those services. The place in which you find them is a market. You learned in Chapter 2 (p, 44) that a market is any arrangement that enables buyers and sellers to get information and to do business