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We are going to learn two very
important things in this lesson: How to find WHAT WE GET and
WHAT WE WANT.
First, we will put demand and supply
together and learn how to use the model to to see how much
businesses will produce to maximize their profits (WHAT WE
GET) and why products have the prices that they do. We will
learn how to use the model to see what causes prices to
change.
If you hear on the news or read in
your news app, that the price of gasoline is going down, we
will be able to explain WHY. The causes of changes in prices
of products are the five non-price determinants of demand
(Pe, Pog, I, Npot, T) and/or the six non-price determinants
of supply (Pe, Pog, Pres, Tech, Tax, Nprod.). Whenever you
hear that the price of something is changing think of which
of these 11 possible causes have changed, draw the graph and
shift the appropriate demand and/or supply graph, and the
graph will show the price changing.
Second, after we learn that in a
competitive market economy the interaction of demand and
supply will determine what the prices of products will be
and how much people will buy at that price, we will ask: Is
this the allocatively efficient quantity and price (WHAT WE
WANT)? Our goal is to show that in a competitive market
prices and quantities will change until allocative
efficiency is achieved.
In lesson 2a we learned that
competitive markets are allocatively efficient. This means
they will produce the quantity of goods that maximizes the
society's satisfaction. After studying lessons 3a, 3b, and
3c we will be able to show the allocatively efficient price
and quantity on a graph. We will learn two of the three ways
to find the allocatively efficient quantity: (1) quantity
were MSB = MSC, and (2) the quantity where consumer surplus
plus producer surplus is maximized. In Unit 3 we will learn
a third way to find the allocatively efficient quantity"
the quantity where P = MC (price equals marginal
cost).
Competitive markets are
efficient.
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