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CHAPTER 3 - SUPPLY, DEMAND AND THE MARKET PROCESS QUOTE - "From the point of view of physics, it is a miracle that 7m New Yorkers are fed each day without any control mechanism other than sheer capitalism." Market mechanism is so efficient at coordinating econ activity, that we take it for granted. Consider: 1. You could move to any area of the country tomorrow and there would most likely be housing available for rent or purchase. There are 67m families and people are moving all the time and find housing. How is it that housing is available? 2. You go into a grocery store and find the stuff you want most of the time. How does the stuff you want just happen to be there? You don't place an order and tell the grocery store when you are coming, yet it is always there. 3. Every day there is enough food for 7m people in NYC. We have never heard of a food shortage in NYC, or a surplus, so it must be that just the right amount food ends up there every day. How does just the right amount of food get there, and how does NYC avoid shortages and surpluses? How does all this econ activity just happen without any direction or control? There are 260m people, 67m families, 135m workers and 7m companies in US. How does $8T of annual economic activity get coordinated? What prevents constant surpluses and shortages? Soviet story - they thought that there was a central command post somewhere sending out orders. They couldn't believe that our economy could operate so efficiently without some type of central planning. We look at a pure market economy and analyze the market process, even though most societies have some combination of government intervention. We assume that the market is totally free from intervention. Prices are set by market forces without interference, for example. Scarcity Requires Rationing When goods are scarce, rationing becomes necessary. How to ration? Price - highest bidder (auction, job market, sports) or willingness to pay (McDonald's, Hudson's, Aretha Franklin tickets, Steinway pianos, etc.) Most economic goods and services (houses, food, clothing, cars, appliances, computers, CDs, dry cleaning, piano tuning, gasoline etc.) get allocated by PRICE. Econ is Price Theory. Supply and demand describe how the price system
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works. We look at basic micro price theory, to understand the basis of econ activity, the micro foundations of macro. CONSUMER CHOICE AND THE LAW OF DEMAND The Scientific Revolution was based on the fact that we finally understood that there were irrefutable, universal scientific laws that govern the physical universe and we had to determine what those laws were - Law of Gravity, the Law of Thermodynamics, the Laws of the Physical Universe, etc. There are also Laws that govern the econ universe. We look at those now.
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This note was uploaded on 11/18/2011 for the course ECON 101 taught by Professor Gottlieb during the Fall '08 term at Rutgers.

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