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Using Supply and Demand to Analyze Markets 3

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Governments often enact policies that affect how markets work. The purpose of these policies can be to serve a particular constituency, to raise necessary tax revenue, or (as we’ll see in Chapter 17) to correct a market failure. For example, every time gas prices rise above the public’s tolerance, some politicians call for a cap on gas prices (or at least an investigation). Judging from the opinion polls that are usually taken at such times, this policy strikes many people as being a good idea. Are they right? Whether changes in market conditions are the result of government market interventions or changes in any of the many factors that affect supply, demand, or both, we can use supply and demand analysis to figure out not only what happens to price and quantity, but also who benefits, who loses, and by how much.

In Chapter 2, we introduced supply and demand analysis. We learned about the economic decisions that supply and demand curves embody, and we defined what it means for a market to be in equilibrium. In this chapter, we put those tools to work to take a deeper look at how markets operate. We study how to measure the total benefits that consumers and producers gain in any given market, and how these benefits change when supply or demand shifts. We also see how various government interventions into markets affect the well-being of consumers and producers.