Market equilibrium

aje on January 20, 2020

Lecture handout: Market equilibrium*

Textbook Reading: Chapter 3 (Intro, Section 3.1, 3.2; pp. 65-83)

Markets are where buyers and sellers meet: where demand and supply interact, and resources get exchanged.

This video shows how demand and supply both originate from the concept of value.

As Brian Albrecht has said: “There’s no such thing as supply. It’s demand all the way down.”

My preferred way of teaching this content is the trading simulation called “Trading in a Pit Market”.

Group activity:

This video shows how prices are formed at the London Metal Exchange:

And this video shows a behind the scenes look at “the ring”:

I use this as a follow up exercise:

Group activity: Copper at the LME, December 2022
Instructor resource: Copper at the LME Solutions, December 2022

A good class activity to teach these concepts is the following worksheet:

Group activity:  Comparative Statics Worksheet
Instructor resource: Comparative Statics Worksheet Solutions

Here’s a look at applying some comparative statics to the UK housing market:

Here’s a more traditional treatment of demand and supply analysis:

Interactive practice: Shifts in supply or demand

Interactive practice: Shifts in both supply and demand curves

Suggested readings:

  • “The Minimum Wage is the Triumph of Expediency Over Economics“, by Samuel Hammond, Niskanen Center, June 22nd 2016 – a collection of empirical evidence of the effect of minimum wages.
  • Roofs or ceilings?, by Milton Friedman and George Stigler, FEE, 1946 – two of the most preeminent Chicago school economists use a comparison of San Francisco in 1906 and 1946 to walkthrough the pros and cons of different ways to ration the housing stock. They find that allowing market prices to reflect actual resource scarcities is the quickest and most equitable way to prompt new construction and a solution to the lack of supply.

Here’s a video on rent control:

In 2020 Berlin adopted rent control and, as economists predicted, it didn’t work. As Andreas Kluth points out in that article:

In a shortage, regulating the price [of a good] only trades one expression of scarcity (high prices) for another (empty shelves).

Perhaps the key lesson of economics is that you cannot escape scarcity.

This page ties into Chapter 3 of Economics: A Complete Guide for Business

Learning Objectives: Apply basic comparative statics to a range of economic events. Understand how interventions affect market activity

Focus on diversity: Legendary microeconomics instructor Walter Williams (1936-2020) wrote extensively on how government restrictions on mutually beneficial exchange can harm minority groups. He studied the impact of minimum wage legislation in apartheid South Africa and published a book called ‘The State Against Blacks‘ . Here is a video about his autobiography, ‘Up From the Projects‘. Here is video footage of a toast from 2003, which occurred when I was his student. Here is a fitting GMU economics department tribute to his career. And here is the gift he left people like me, to stop me doing things like this.