To address such questions, economists use the concept of market
efficiency. We will explore this concept in more detail in later chapters, but
for now we simply introduce the idea and see how it helps us understand
the overall effects of price controls. We begin by taking a slightly different
look at market demand and supply curves.
Demand as “Value” and Supply as
“Cost”
In Chapter 3 we saw that the market demand curve for any product
shows, for each possible price, how much of that product consumers want
to purchase. Similarly, we saw that the market supply curve shows how
much producers want to sell at each possible price. But we can turn
things around and view these curves in a slightly different way—by
starting with any given quantity and asking about the price. Specifically,
we can consider the highest price that consumers are willing to pay and
the lowest price that producers are willing to accept for any given unit of
the product. As we will see, viewing demand and supply curves in this
manner helps us think about how society as a whole benefits by
producing and consuming any given amount of some product.
Let’s begin by considering the market demand curve for pizza, as shown
in part (i) of Figure 5-5. Each point on the demand curve shows the
highest price consumers are willing to pay for a given pizza. (We assume
for simplicity that all pizzas are identical.) At point A we see that
consumers are willing to pay up to $20 for the 100th pizza, and at point