THE MARKET

SYSTEM
DEMAND, SUPPLY
AND RRICE DETE
 Market System
A market system is the network of buyers, sellers and
other actors that come together to trade in a given
product or service.

It is consists of:
Consumers (people that buy a product)
create a demand for a product
Businesses (sellers and creators of products)
Gains from Markets
◦Gains in a market are referred to as total welfare or
economic surplus.  Within total welfare, economists look
at consumer surplus and producer surplus.
A surplus is defined as the excess of a good or service
when the quantity supplied exceeds the quantity demanded;
this occurs when the price is above the equilibrium price.
Consumer surplus is the monetary
gain that consumers receive when
they purchase a good for less than
the highest price they are willing to
pay.

Producer surplus is the amount

that producers benefit by selling a
good at a market price that is higher
than the least that they would be
willing to sell it for. 

Economic Surpluses:
The total welfare
(or economic surplus) is the sum of
the consumer surplus and the
producer surplus.
Production Possibility Frontier
◦A production-possibility frontier (PPF) graphs the combinations for the
production of two commodities with which the same amounts are used.

◦Within a market system, economists use the production possibility frontier (PPF)
to graph the combinations of the amounts of two commodities that can be
produced using the same amount of each factor of production. A PPF graph
chooses specific input quantities. As a result, it shows the maximum production
level for one commodity for any production level of the other commodity. PPF is
used to define production efficiency.
A common PPF: A
common PPF where there
is an increase in
opportunity cost.
An inverted PPF: An
inverted PPF where the
opportunity cost is
decreasing.
A straight line PPF: A
straight line PPF where the
opportunity cost is
constant.
The Circular Flow Model
◦In economics, a circular flow
model is a diagram that is used to
represent the monetary
transactions in an economy.
The Circular Flow Model
◦In economics, a circular flow model is a diagram that is
used to represent the monetary transactions in an economy.

Two flows present within the model including

flows of physical things (goods or labor)
flows of money (what pays for physical things).
Circular flow of goods income: The circular flow model shows the flow of
payments between households and firms.
The Circular Flow Model
The circular flow of payments is important within an economy because it
1) measures the national income
2) provides knowledge of interdependence
3) illustrates the unending nature of economic activities, and
4) shows injections and leakages.

The circular flow of income follows a specific pattern: Production → Income →

Expenditure → Production. This circular flow is ongoing between households and
firms.
Production
Possibilities
Frontier Curve:
The graph
illustrates a typical
production
possibilities
frontier curve.
When a market is
operating on the
PPF it is said to be
efficient.
What is Demand?
Demand – the amount consumers desire to purchase at various prices – Not what they will buy,
but what they would like to buy!

Effective demand – must be willing AND able to pay Willing and able
What is Demand?
Demand – the amount consumers desire to purchase at various prices – Not what they will buy,
but what they would like to buy!

Effective demand – must be willing AND able to pay Willing and able
What is Demand?
Demand – the amount consumers desire to purchase at various prices – Not what they will buy,
but what they would like to buy!

Effective demand – must be willing AND able to pay Willing and able