Overview

Product markets are where buyers and sellers interact to exchange goods and services. This topic explores how supply and demand determine prices, how elasticity affects responsiveness, and how market efficiency is impacted by government interventions like taxes and price controls.

Key Themes and Concepts

• Supply and Demand: Demand shows consumer willingness to buy; supply shows producer willingness to sell. Equilibrium occurs where they intersect.
• Determinants:
  • Demand: Income, preferences, price of related goods, expectations, number of buyers
  • Supply: Input costs, technology, expectations, number of sellers
• Elasticity:
  • Price elasticity of demand: Measures how quantity demanded changes with price.
  • Cross-price and income elasticities: Show how goods are related (substitutes or complements) and income effects.
  • Price elasticity of supply: Measures responsiveness of quantity supplied to price.
• Market Efficiency:
  • Consumer surplus: Difference between what buyers are willing to pay and what they actually pay.
  • Producer surplus: Difference between what sellers receive and their minimum acceptable price.
  • Total surplus: Sum of consumer and producer surplus — maximized at equilibrium.
• Taxes and Deadweight Loss: Taxes create inefficiency by reducing the quantity traded. Deadweight loss is the value of trades not made due to tax.
• Price Controls:
  • Price ceilings: Legal maximum price (e.g., rent control) — may cause shortages.
  • Price floors: Legal minimum price (e.g., minimum wage) — may cause surpluses.

Quick Tip

Markets work best when supply and demand are free to adjust. Elasticity shows how flexible buyers and sellers are, and market efficiency hinges on maximizing total surplus. Price controls and taxes often help equity, but at a cost to efficiency.