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Ten Principles of Economics - Part 7

Ten Principles of Economics - Part 7. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | IN THIS CHAPTER YOU WILL . . . Learn the nature of a competitive market Examine what determines the demand for a good in a competitive market THE MARKET FORCES OF SUPPLY AND DEMAND Examine what determines the supply of a good in a competitive market When a cold snap hits Florida the price of orange juice rises in supermarkets throughout the country. When the weather turns warm in New England every summer the price of hotel rooms in the Caribbean plummets. When a war breaks out in the Middle East the price of gasoline in the United States rises and the price of a used Cadillac falls. What do these events have in common They all show the workings of supply and demand. Supply and demand are the two words that economists use most often and for good reason. Supply and demand are the forces that make market economies work. They determine the quantity of each good produced and the price at which it is sold. If you want to know how any event or policy will affect the economy you must think first about how it will affect supply and demand. This chapter introduces the theory of supply and demand. It considers how buyers and sellers behave and how they interact with one another. It shows how See how supply and demand together set the price of a good and the quantity sold Consider the key role of prices in allocating scarce resources in market economies 65 66 PART TWO SUPPLY AND DEMAND I HOW MARKETS WORK supply and demand determine prices in a market economy and how prices in turn allocate the economy s scarce resources. MARKETS AND COMPETITION market a group of buyers and sellers of a particular good or service The terms supply and demand refer to the behavior of people as they interact with one another in markets. A market is a group of buyers and sellers of a particular good or service. The buyers as a group determine the demand for the product and the sellers as a group determine the supply of the product. Before discussing how buyers and sellers behave let s first .