Question

In 2 pages and diagrams please answer in detail the following. In the U.S. economy consumers and producers are equally responsible for market prices and the number of units purchased (sold) in markets. Neither group has more market power than the other. Explain why you either agree or disagree with this statement.

Answer 1

I agree with the statement that, in the US economy, consumers and producers are equally responsible for market prices and quantities. This is because both groups are elastic demand and supply curves (respectively).

Market prices and quantities sold or purchased are determined by the interaction of demand and supply curves. Following is the example:

In this example, point (1.5, 1.5) is the equilibrium point where demand and supply curves meet. Notice that demand curve is download sloping i.e. consumers demand more when the price falls. Similarly, notice that we have an upward sloping supply curve, i.e. producers are willing to produce more only when the price increases. In an economy, the market price is determined such that some of the consumers are willing to pay at that price as well as some producers are willing to produce.

Now, coming to the fact that consumers and producers would be equally responsible for market equilibrium in the US. Look at the following diagram carefully to understand the role of elasticity.

In the above diagram, our demand curve is perfectly elastic. It means that consumers buy an infinite amount of a good if the price is 1.5 or below. However, consumers will not buy anything if the price rises slightly above 1.5. In this case, even if the supply of good increases (i.e. supply curve shifts rightward, see below), there is no change in the equilibrium price but quantity increases by the same amount as the increase in supply. Here, consumers are more responsible. Further, exactly opposite case would be of inelastic supply curve (i.e. straight supply curve) where only market price would increase if demand increases.

Given these, in the US economy context, both consumers and producers are more or less equally elastic. While consumers can choose between a wide variety of products, the demand for each product is still download sloping. Likewise, US suppliers are not constrained by demand from domestic consumers. They are big exporters. Moreover, investment in research and technology contributes to constantly improving production, thus, preventing an inelastic supply curve.