learning objectivesAfter reading this chapter you will be familiar with the following:
• the underlying premises of an ideal market economy;
• determinants of market demand and supply of a product;
• market demand as a measure of consumers’ willingness to pay;
• the law of diminishing marginal utility;
• the concepts of average and marginal costs;
• the law of diminishing marginal product;
• the concepts of short run versus long run;
• the concepts of consumers’ and producers’ surpluses;
• a concept of economic efficiency or Pareto optimality;
• the role of prices as measures of absolute and relative scarcity;
• price as a measure of the “true” scarcity value of a product;
• the adequacy of product price as a measure of emerging natural resource scarcity.
Markets respond to price signals. If a resource, whether it be a barrel of oil, a patch of Louisiana swamp or old-growth forest, or a breath of fresh air, is priced to reflect its true and complete cost to society, goes the argument, market will ensure that those resources are used in an optimally efficient way.