Economics

Economics of Global Climate Change

May 7, 2012, 6:19 pm
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Most economists agree that market forces are poorly suited to the allocation of natural resources such as Earth’s atmosphere. Market forces refer to the influence of supply and demand on the distribution of goods or services. Supply is the willingness and ability to provide a good or service, and demand is the desire for a good or service, as indicated by the willingness and ability to pay.

Market demand refers to the desirability of a good or service in the marketplace. Demand for a good or service depends primarily on its price. As its price increases, consumers will purchase less of the good or service, and the quantity consumed will decrease. The entire demand curve will shift to the right if consumers become wealthier (e.g., greater wealth in China increases the demand for electricity and thereby the demand for coal), if alternative goods or services become more expensive (e.g., higher oil prices increase the demand for coal), or if advertising creates greater consumer demand (e.g., ads for inexpensive, clean-burning, automatic coal stoves attract new customers).

Market supply refers to how much of a good or service is available for sale in the marketplace. Higher prices generally increase the supply. The entire supply curve will shift to the left if the price of inputs (labor, capital, and land), which production of the good or service requires, increases. Conversely, the supply curve will shift to the right if technological advances decrease input costs. For example, a new labor contract that provides higher salaries for coal miners shifts the supply curve to the left, whereas the invention of sophisticated coal-mining equipment that decreases labor requirements shifts the supply curve to the right. Equilibrium price for a good or service is the price at which the quantity desired of a good or service equals the quantity available. Market forces of supply and demand tend to sustain the equilibrium price. Were the price any higher than the equilibrium price, the quantity desired would decline, and the quantity available would increase until an excess in supply developed. Eventually, this glut would lead sellers to lower their prices to the equilibrium level. In contrast, if the price was below the equilibrium price, the quantity desired would increase, and the quantity available would decline until an excess in demand developed. This shortage would stimulate a price increase to the equilibrium level. Market forces are economic factors that influence prices in a free market through their effects on supply and demand. A shift in the demand curve from increased wealth or more expensive alternatives moves the equilibrium price and quantity upward. A shift in the supply curve from increased input costs also moves the equilibrium price upward but the quantity downward.

This is an excerpt from the book Global Climate Change: Convergence of Disciplines by Dr. Arnold J. Bloom and taken from UCVerse of the University of California.

©2010 Sinauer Associates and UC Regents

Glossary

Citation

Bloom, A. (2012). Economics of Global Climate Change. Retrieved from http://www.eoearth.org/view/article/51cbf00a7896bb431f6a0009

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