Part B | How markets work.

In Part A we set up the landscape of what's possible. But we left with the question where on the PPF is best. Part B introduces markets as a way to arbitrate which point on the PPF we should choose.

We start Party B by slipping in prices to develop Supply and Demand. We take these concepts to a market and ask where prices come from. With low prices we have a shortage, and both the seller and buyer have an incentive to raise prices. With high prices we have an excess, and both the seller and buyer have an incentive to lower prices. There is only one point when neither buyer nor seller wishes to raise or lower prices. This is when quantity demanded equals quantity supplied. This looks like all the spinach getting sold and no buyer going home empty handed. We call this Market Clearing, which happens when quantity supplied equals quantity demanded. There is only one price that makes this happen and is found when Demand and Supply intersect.

In competitive markets this set of incentives leads to the sum of Consumer Surplus and Producer Surplus, Total Surplus, being at its largest. This isn't true in every market, which we'll return to in Part C. But the competitive markets we face have this property, that the prices set by the market give us Social Efficiency, maximum Surplus Value.