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
Market mechanism is so efficient at coordinating econ activity, that we take it for
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?
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.
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