• Information, interaction and competition.

• Price squeezes/narrows to where Qs = Qd and the market clears.

• This price facilitates all transactions that can improve the well-being of market participants.

• Market equilibrium maximizes well-being!

• Voluntary Trade makes people better off!

Equilibrium• Buyers • Sellers

• Goods go to consumers with the highest value (WTP)

• Goods are produced the sellers with the lowest opportunity cost (WTS)

• Market equilibrium maximizes well-being!

• Voluntary Trade makes people better off!

Equilibrium• Buyers • Sellers

Seasonal Variation: Apples

Seasonal Variation: Beachfront Cottages

Markets in Action

Test Your Knowledge

Four Questions

Are You Ready?

Cranberries, the Ruby Slipper & Your Health

1. What would you expect to happen if a new machine called the Ruby Slipper is introduced that dramatically improves the cranberry harvesting process?

A. The demand for cranberries would increase because more cranberries will be produced.

B. The supply of cranberries will increase as the marginal cost of production for farmers falls.

C. The quantity of cranberries purchased will increase as the price falls.

D. Both A and B are correct.

E. Both B and C are correct.

2. Suppose that newly released medical research reveals significant health benefits associated with increased cranberry consumption?

A. The demand for cranberries will increase as people seek the added health benefits of cranberries.

B. The supply of cranberries will increase as more people want to eat cranberries.

C. The quantity of cranberries produced will increase as the price rises.

D. Both A and B are correct.

E. Both A and C are correct.

3. Suppose that both the introduction of the new harvesting machine and the announced health benefits happened simultaneously.

What would you expect would happen to both the price of cranberries and the quantity of cranberries produced?

• When big (flat) screen TVs were first introduced in the 1990s they were very expensive and very few households owned one.

• Over time there were technological advancements in the production process.

• Over the same period average household incomes also rose significantly.

The Final Question

4. What effect would these changes have on the supply and/or demand in the market for big (flat) screen TVs?

Consumers have more income

Advancing technology among sellers

1. How do consumers respond to price changes for the following goods/services?

• salt, public transportation, gasoline, automobiles

3. What if you wanted to help low skilled workers?

5. What if you wanted less pollution?

4. What if you wanted to reduce congestion on city streets?

2. What if you wanted to help poor people afford housing?