1.5: Concluding Comments

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To recap, this chapter has introduced concepts essential to understanding the demand side of the market. First, you learned about different demand states. As you move forward through the course, the focus will be primarily on products in an effective demand state. You will, however, examine models appropriate for understanding products in other demand states in chapter 5. In chapter 3, you will revisit the demand shift variables as you learn elasticities. These shift variables will play a central role in chapter 4, as you model market equilibrium. Consumer surplus will central to measuring welfare in chapters 7 and 8 and will help motivate the ideas behind pricing schemes commonly used be sellers to extract consumer surplus and turn it into higher profit margins.

A question central to this course relates to how markets address the economic allocation problem. Any economic system needs to answer questions such as the following (see Kohls and Uhl 1998).

What to produce?
How much to produce?
How to produce?
How to distribute production?

In many cases, market-determined prices provide the information needed for the economy to efficiently respond to these questions. The content of this chapter relates directly to the fourth question. A consumer with a dollar to spend will use it in the market that provides him or her with the most surplus, and you have already seen that surplus depends on the price. Provided consumers know their valuation of a product, a set of market prices provides the information necessary for consumers to self-sort into markets where they obtain the most surplus. This helps to ensure that products and services are allocated to those consumers who value them most and as you will see in the coming chapters, value them sufficiently to justify the production costs.