Chapter 3, 4: Supply and Demand market efficiency and market failure

Market Definition: A market is a place where buyers and sellers meet. It can be physical or online.
Goals of the Chapter:
1. Understand the difference between quantity demanded and demand.
2. Understand the difference between quantity supplied and supply.
3. Learn how supply and demand affect price and quantity in a market.

Law of Demand:
- When the price increases, quantity demanded decreases.
- When the price decreases, quantity demanded increases.
Demand Schedule & Demand Curve:
- Demand schedule: A table showing how much people will buy at different prices.
- Demand curve: A graph showing the relationship between price and quantity demanded.
Market Demand: The total demand from all buyers.

Factors That Change Demand (Not related to price):

Prices of related goods:
- Substitutes (e.g., apples vs. oranges) → If the price of one goes up, demand for the other increases.
- Complements (e.g., ice cream & fudge) → If the price of one goes up, demand for both decreases.
Expected future prices: If prices are expected to rise, people buy more now.
Income:
- Normal goods: Demand increases when income increases.
- Inferior goods: Demand decreases when income increases.
Number of buyers: More buyers mean higher demand.
Preferences: Trends and new products change demand.

Changes in Demand vs. Changes in Quantity Demanded:

Change in demand: Caused by factors other than price (new trends, more buyers, etc.).
Change in quantity demanded: Caused by price changes.

Law of Supply:
- When price increases, quantity supplied increases.
- When price decreases, quantity supplied decreases.
Supply Schedule & Supply Curve:
- Supply schedule: A table showing how much sellers will offer at different prices.
- Supply curve: A graph showing the relationship between price and quantity supplied.
Market Supply: The total supply from all sellers.

Factors That Change Supply (Not related to price):

Prices of related goods:
- Substitutes in production (e.g., trucks vs. SUVs) → If one is more profitable, supply of the other decreases.
- Complements in production (e.g., cream & skim milk) → If one is produced more, supply of the other increases.
Prices of resources & inputs: Higher production costs reduce supply.
Expected future prices: If prices are expected to rise, suppliers may hold back supply.
Number of sellers: More sellers mean higher supply.
Productivity: Better technology increases supply.

Changes in Supply vs. Changes in Quantity Supplied:

Change in supply: Caused by factors other than price (cost of materials, number of sellers, etc.).
Change in quantity supplied: Caused by price changes.

Market Equilibrium: When quantity demanded = quantity supplied.
- Equilibrium price: The price where supply and demand are balanced.
- Equilibrium quantity: The amount bought and sold at this price.
Law of Market Forces:
- Shortage (demand > supply) → Prices rise.
- Surplus (supply > demand) → Prices fall.

How Events Affect Market Equilibrium:

Changes in Demand (Example: People stop drinking tap water → Bottled water demand increases).
- Demand increases → Higher price & higher quantity.
- Demand decreases → Lower price & lower quantity.
Changes in Supply (Example: More bottled water suppliers enter the market).
- Supply increases → Lower price & higher quantity.
- Supply decreases → Higher price & lower quantity.
Changes in Both Demand & Supply:
- Both increase → Quantity increases, price depends.
- Both decrease → Quantity decreases, price depends.
- Demand increases & supply decreases → Price increases, quantity depends.
- Demand decreases & supply increases → Price decreases, quantity depends.

Consumer Surplus: The difference between what a consumer is willing to pay and the actual price paid.
Producer Surplus: The difference between the lowest price a seller would accept and the actual price received.
Total Surplus: The sum of consumer and producer surplus. It shows the total benefit in a market.

A market is efficient when resources are used in the best way, maximizing total surplus.
Competitive Equilibrium: The point where supply meets demand, ensuring maximum efficiency.
Deadweight Loss: A loss of economic efficiency that happens when markets are not in equilibrium (too much or too little production).

Price Ceiling (Maximum Price): A legal limit on how high a price can be (e.g., rent control).
- Leads to shortages because demand is higher than supply.
- Example: If rent is capped, more people want apartments, but landlords rent out fewer.
Price Floor (Minimum Price): A legal limit on how low a price can be (e.g., minimum wage).
- Leads to surpluses because supply is higher than demand.
- Example: If the minimum wage is too high, businesses may hire fewer workers.
Black Markets: When price controls cause shortages, people may trade illegally at higher prices.

Externality: A cost or benefit that affects people who are not directly involved in the market.
- Negative Externality: Harmful effects (e.g., pollution, smoking).
- Positive Externality: Beneficial effects (e.g., education, vaccines).
Market Failure: When externalities cause inefficient production or consumption.
Social Cost and Benefit:
- Social Cost = Private Cost (cost to the producer) + External Cost (cost to others).
- Social Benefit = Private Benefit (benefit to consumer) + External Benefit (benefit to others).

Taxes on Negative Externalities:
- Example: A tax on pollution makes companies pay for the harm they cause, reducing pollution.
Subsidies for Positive Externalities:
- Example: Government subsidies for education encourage more people to study, benefiting society.
Tradable Emissions Permits (Cap-and-Trade):
- A system where companies buy or sell permits to pollute, limiting overall pollution.

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