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Chapter 5

Chapter 5 Markets in Action.docx

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Economics (Arts)
ECON 208
Mayssun El- Attar Vilalta

Chapter 5 Markets in Action 5.1 The Interaction Among Markets  No market or industry exists in isolation from the economy’s many other markets  Partial-equilibrium analysis: the analysis of single market in isolation, ignoring any feedbacks that may come from induced changes in other markets  If a specific market is quite small relative to the entire economy, changes in the market will have relatively small effects on other markets. The feedback effects on the original market will, in turn, be even smaller. In such cases, partial-equilibrium analysis can successfully be used to analyze the original market  General-equilibrium analysis: the analysis of all the economy’s markets simultaneously, recognizing the interactions among the various markets  General-equilibrium analysis is the study of how all markets function together, taking into account the various relationships and feedback effects among individual markets 5.2 Government-Controlled Prices Disequilibrium Prices  At any disequilibrium price, quantity exchanged is determined by the lesser of quantity demanded or quantity supplied Price Floors  Binding price floors lead to excess supply. Either an unsold surplus will exist, or someone (usually the govt) must enter the market and buy the excess supply Price Ceilings  Binding price ceilings lead to excess demand, with the quantity exchanged being < in the free- market equilibrium Allocating a Product in Excess Demand  Sellers’ preferences: allocation of commodities in excess demand by decisions of the sellers Black Markets  Black market: a situation in which goods are sold ill
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