Supply and Demand

 A market economy is an economy that allocates resources through the

decentralized decisions of many firms and households as they interact in markets
for goods and services.

 Households decide what to buy and who to work for.

 Firms decide who to hire and what to produce.

 Adam Smith made the observation that households and firms interacting in
markets act as if guided by an “invisible hand.”

 Because households and firms look at prices when deciding what to buy
and sell, they unknowingly take into account the social costs of their
actions.

 As a result, prices guide decision makers to reach outcomes that tend to

maximize the welfare of society as a whole.

- In the market, price of commodities are determined by the interplay of supply and
demand.
- With minimal or no government intervention, prices are deregulated.

The law of supply and demand

- When demand is greater than supply (supply is less than demand), price
increases (shortage market)
- When demand is less than supply (supply is greater than demand), price
decreases (surplus market)
Market price is the price of agreement between demand and supply known as
the equilibrium.

Supply and demand schedule

Social cost:

- Adam Smith (1776) mentioned that market as a free institution could lead to
social costs;
- Inflation, defined as the increase of prices among basic commodities.
- an outcome where the market experience a shortage.
- With higher prices less goods and services are purchased and
bought

- Unemployment
- Lack of opportunity to showcase skills and competence
- A situation where the market is in a surplus
- More goods lower price hence, decreases production, less demand
for labor
- Low production, less income, lower demand, lower profit

Market situations:
- Market Externalities
- How a certain decision or act of man influences others directly or
indirectly.
- Example: a man dumping garbage in the estero, as soon as
there are heavy rain places would surely be flooded. With
the garbage thrown esteros or water ways (canal) are
clogged hence heavy flooding.
- Dynamite fishing would kill not just the fish but the corals
where the school of fish lived and multiply, but because of
destruction all other fishermen finds it difficult to catch more
fish and eventually prices of fish goes up hence the common
tao cannot buy any more.
 - Externalities are either positive or negative externalities.
- Negative externalities; refer to the example given above.
- Positive externalities;
- Helping the poor
- Planting trees
- Cleaning the esteros
- Extending goodwill to others and the likes
- Market power
- Is a situation where the market is manipulated by the few powerful entities
- These entities has the power to monopolized production hence control
price
- This leads to loss of economic welfare and unequitable distribution of
goods and services
- Market failure
- Is a situation where the market becomes incapable of efficiently
distributing the goods and services to the people
- This could be attributed to crisis, such as the pandemic we are
experiencing now, the Covid 19.
- Manifestation: inflation and unemployment are high (recession)