CHAPTER 10 STUDY GUIDE
10.0 INTRODUCTION
1. A good way to think about the demand curve is that it represents, “consumers’ willingness
and ability to pay for a good.” It is good to think of each point on the demand curve as
representing an individual consumer, and the price is the “reservation price,” or “willingness
to pay” for the good. Any price higher than that price, and the consumer will not purchase the
good.
2. Similarly, a good way to view the supply curve is that it represents the, “cost of production.”
It is useful to think of each point on the supply curve as an individual producer, and the price
is the minimum price needed to induce the firm to produce the good. Any price lower than
the supply price will not be enough to get the firm to produce the good.
10.1 WHAT IS A MARKET?
1. A good example of a marketplace is eBay. The company eBay provides an online auction
that blurs the distinction between a market and a marketplace. The online auction provides a
unique service to consumers by enhancing efficiency. The auction has millions of items,
including collectibles, appliances, computers, equipment, and many more valuables.
Economists have spent a great deal of time analyzing eBay, and have used it to study auction
behavior, auction formats, and how buyers and sellers interact.
10.2 MARKET EQUILIBRIUM
1. Economists emphasize the positive attributes of a free-market equilibrium. There are many
positive features of a free-market equilibrium, including that there is no coercion; all trades
are voluntary. In equilibrium, the quantity supplied is equal to the quantity demanded, so
there are no shortages or surpluses. All of these are positive characteristics of market
equilibria. Notice, however, that not all consumers get to purchase the good, as many are
priced out of the market. Consumers whose willingness to pay is higher than the market price
do not purchase the good. This means that not everyone will get the good. If the good is food,
for example, many in society will not have the willingness and/or ability to purchase the
good at the market price.
2. Likewise, not all producers will be able to produce and sell the good at a profitable level. For
all producers with a cost of production greater than the market price, they will not be able to
sell the good and remain in business. Therefore, there are some individuals who would like to
work in a certain industry, and cannot do it due to high costs. These features of the market
equilibria are not typically emphasized in textbooks.
3. The self-correcting nature of the market mechanism is elegant, powerful, and sustainable.
Even Marxists or other opponents of capitalism should recognize the enormous societal
benefits of markets. Through voluntary exchange alone, surpluses and shortages disappear,
and the market returns to equilibrium where quantity supplied is equal to quantity demanded.
No government coercion is necessary. The market system allows individuals to make
decisions based on self-interest, which result in efficient outcomes.
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