III. Now read the text and check your answers to the statements from ex. II.

Earlier we defined markets in a very general way as a set of arrangements through which prices guide resource allocation. We now adopt a narrower definition. A market is a set of arrangements by which buyers and sellers are in contact to exchange goods or services.

Some markets (shops and fruit stalls) physically bring together the buyer and the seller. Other markets (the London Stock Exchange) operate chiefly through intermediaries (stockbrokers) who transact business on behalf of clients. In supermarkets, sellers choose the price, stock the shelves, and leave customers to choose whether or not to make a purchase. Antique auctions force buyers to bid againsteach other with the seller taking a passive role.

Although superficially different, these markets perform the same economic function; they determine prices that ensure that the quantity people wish to buy equals the quantity people wish to sell. Price and quantity cannot be considered separately. In establishing that the price of a Rolls Royce is ten times the price of a small Ford, the market for motor cars simultaneously ensures that production and sales of small Fords will greatly exceed the production and sales of Rolls Royce. These prices guide society in choosing what, how, and for whom to purchase.

To understand this process more fully, we require a model of a typical market. The essential features on which such a model must concentrate are demand, the behaviour of buyers, and supply, the behaviour of sellers. It will then be possible to study the interaction of these forces to see how a market works in practice.

Demand is the quantity of goods buyers wish to purchase at each conceivable price. Thus demand is not a particular quantity, such as, six bars of chocolate, but rather a full description of the quantity of chocolate the buyer would purchase at each and every price which might be charged.

Supply is the quantity of goods sellers wish to sell at each conceivable price. Again, supply is not a particular quantity but a complete description of the quantity that sellers would like to sell at each and every possible price.

Notice the distinction between demand and the quantity demanded. Demand describes the behaviour of buyers at every price. The term ‘quantity demanded’ makes sense only in relation to a particular price. A similar distinction applies to supply and quantity supplied.

In everyday language, we would say that when the demand for football tickets exceeds their supply, some people will not get into the ground. Economists must be more precise. At the price charged for tickets, the quantity demanded exceeded the quantity supplied. Although the size of the ground sets an upper limit on the quantity of tickets that can be supplied, higher tickets prices would have reduced the quantity demanded, perhaps leaving empty space in the ground. Yet there has been no change in demand, the schedule describing how many people want admission at each possible ticket price. The quantity demanded has changed because the price has changed.

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