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The supply-and-demand framework is almost certainly the most powerful model in the economist’s toolkit. Armed with an understanding of this framework, you can make sense of much economic news, and you can make intelligent predictions about future changes in prices.
A true understanding of this framework is more than just an ability to shift curves around, however. It is an understanding of how markets and prices are one of the main ways in which the world is interlinked. Markets are, quite simply, at the heart of economic life. Markets are the means by which suppliers and demanders of goods and services can meet and exchange their wares. Since exchange creates value—because it makes both buyers and sellers better off—markets are the means by which our economy can prosper. Markets are the means by which economic activity is coordinated in our economy, allowing us to specialize in what we do best and to buy other goods and services.
Economists regularly point to these features of markets, but this should not blind us to the fact that markets can go wrong. There are many ways in which market outcomes may not be the most desirable or efficient, as the global financial crisis revealed. In the remainder of this book, we look in considerable detail at all the ways that markets can fail us as well as help us.
Fill in the blanks in the following table. What can you say about the missing price in the table?
Table 4.2 Individual and Market Demand
|Price of Chocolate Bar||Household 1’s Demand||Household 2’s Demand||Market Demand|
What happens to the value of the US dollar if
Using a spreadsheet, construct a version of Table 4.1 "Market Equilibrium: An Example" assuming thatmarket demand = 50 − 0.005 × price.
Fill in all the prices (in thousands) from 1,000 to 100,000. What is the equilibrium price and quantity in the market? How would you explain the difference between this equilibrium and the one displayed in Table 4.1 "Market Equilibrium: An Example"?