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Market model

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The simple market model described.

The simple market model described.


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  • 1. Market modeljuliohuato@gmail.com
  • 2. Recap Production and consumption  Descriptive model  Analytical model (PPF) Social structures (social organisms and organizations)  Cooperation and trade  Budget line model Market model is next!
  • 3. Markets Premise: private ownership over goods (“commodities”) Markets for  regular goods (e.g. oranges, bread, computers, cars, houses) &  productive resources (L, K & NR)
  • 4. Section goals Forthe section: to learn about how actual markets operate by comparison/contrast with a simple, competitive market under a few idealized conditions
  • 5. A simple marketA homogeneous or standard good Many buyers and many sellers Our simple market can be defined as – people (buyers and sellers) trading a given good; since there are many buyers & sellers and good is standard, the market is “perfectly competitive” (individuals have no “market power” – i.e. they are “price takers,” not “price setters”)
  • 6. Model-building strategy1. Split the market into buyers and sellers2. Study the behavior of buyers a.k.a. demand (KQ: What makes the buyers buy more/less of the good?)3. Study the behavior of sellers a.k.a. supply (KQ: What makes the sellers sell more/less of the good?)4. Fit demand & supply together a.k.a. “equilibrium”5. Shock the model in interesting ways (play “what-if”) (KQ: If a given factor affecting demand/supply changes, what happens to “equilibrium”?)6. Use it to deal with practical questions (price ceilings/floors, quotas, taxes, elasticity analysis)
  • 7. DemandKQ: What makes buyers buy more/less of agiven good?
  • 8. DemandKQ: What makes buyers buy more/less of agiven good? Price of the good
  • 9. DemandKQ: What makes buyers buy more/less of agiven good? Price of the good Income/wealth of buyers
  • 10. DemandKQ: What makes buyers buy more/less of agiven good? Price of the good Income/wealth of buyers Tastes of buyers
  • 11. DemandKQ: What makes buyers buy more/less of agiven good? Price of the good Income/wealth of buyers Tastes of buyers Prices of other goods
  • 12. DemandKQ: What makes buyers buy more/less of agiven good? Price of the good Income/wealth of buyers Tastes of buyers Prices of other goods Expectations about the above Etc.
  • 13. Demand Movement along the curve (the quantity demanded increases)
  • 14. Demand Rightward shift of the whole curve (the demand increases)
  • 15. SupplyKQ: What makes sellers sell more/less of agiven good?
  • 16. SupplyKQ: What makes buyers buy more/less of agiven good? Price of the good
  • 17. SupplyKQ: What makes buyers buy more/less of agiven good? Price of the good Cost of producing the good
  • 18. SupplyKQ: What makes buyers buy more/less of agiven good? Price of the good Cost of producing the good  Price of inputs
  • 19. SupplyKQ: What makes buyers buy more/less of agiven good? Price of the good Cost of producing the good  Price of inputs  Technology
  • 20. SupplyKQ: What makes buyers buy more/less of agiven good? Price of the good Cost of producing the good  Price of inputs  Technology Prices of other goods
  • 21. SupplyKQ: What makes buyers buy more/less of agiven good? Price of the good Cost of producing the good  Price of inputs  Technology Prices of other goods Expectations about the above Etc.
  • 22. Supply Movement along the curve (the quantity supplied increases)
  • 23. Supply Shift of the whole curve (the supply increases)
  • 24. Market equilibrium
  • 25. Market equilibrium
  • 26. Finding equilibrium
  • 27. Finding equilibrium
  • 28. Market equilibrium
  • 29. Demand shock
  • 30. Supply shock
  • 31. Demand & supply schedules Price Quantity Quantity Glut or ($/unit) demanded supplied shortage (units) (units)A 10 100 400 300B 9 150 350 200C 8 200 300 100D 7 250 250 0E 6 300 200 100F 5 350 150 200D 4 400 100 300
  • 32. Demand & supply schedules
  • 33. Demand & supply schedules Price Quantity Quantity Glut or ($/unit) demanded supplied shortage (units) (units)A 10 100 400 300B 9 150 350 200C 8 200 300 100D 7 250 250 0E 6 300 200 100F 5 350 150 200D 4 400 100 300
  • 34. Algebra
  • 35. Algebra (“inverse demand”) Demand equation (usual form)
  • 36. Algebra (“inverse demand”) Demand equation (usual form) (“inverse supply”) Supply equation (usual form)
  • 37. Algebra (“inverse demand”) Demand equation (usual form) (“inverse supply”) Supply equation (usual form) Equilibrium
  • 38. Algebra (“inverse demand”) Demand equation (usual form) (“inverse supply”) Supply equation (usual form) Equilibrium
  • 39. Algebra (“inverse demand”) Demand equation (usual form) (“inverse supply”) Supply equation (usual form) Equilibrium
  • 40. Algebra (“inverse demand”) Demand equation (usual form) (“inverse supply”) Supply equation (usual form) Equilibrium
  • 41. Algebra (“inverse demand”) Demand equation (usual form) (“inverse supply”) Supply equation (usual form) Equilibrium
  • 42. Algebra (“inverse demand”) Demand equation (usual form) (“inverse supply”) Supply equation (usual form) Equilibrium
  • 43. Algebra (“inverse demand”) Demand equation (usual form) (“inverse supply”) Supply equation (usual form) Equilibrium
  • 44. Algebra (“inverse demand”) Demand equation (usual form) (“inverse supply”) Supply equation (usual form) Equilibrium
  • 45. Algebra (“inverse demand”) Demand equation (usual form) (“inverse supply”) Supply equation (usual form) Equilibrium
  • 46. Algebra (“inverse demand”) Demand equation (usual form) (“inverse supply”) Supply equation (usual form) Equilibrium
  • 47. Summary
  • 48. Summary We began to study how markets operate by comparison/contrast with a simple abstract model of a “perfectly competitive”
  • 49. Summary We began to study how markets operate by comparison/contrast with a simple abstract model of a “perfectly competitive” We emphasized its simplicity, its abstract and mechanical character
  • 50. Summary We began to study how markets operate by comparison/contrast with a simple abstract model of a “perfectly competitive” We emphasized its simplicity, its abstract and mechanical character We fitted the topic in the context of our course’s goals
  • 51. Summary We began to study how markets operate by comparison/contrast with a simple abstract model of a “perfectly competitive” We emphasized its simplicity, its abstract and mechanical character We fitted the topic in the context of our course’s goals We laid out a strategy to build the model
  • 52. Summary We began to study how markets operate by comparison/contrast with a simple abstract model of a “perfectly competitive” We emphasized its simplicity, its abstract and mechanical character We fitted the topic in the context of our course’s goals We laid out a strategy to build the model We looked at the demand and supply sides separately
  • 53. Summary We began to study how markets operate by comparison/contrast with a simple abstract model of a “perfectly competitive” We emphasized its simplicity, its abstract and mechanical character We fitted the topic in the context of our course’s goals We laid out a strategy to build the model We looked at the demand and supply sides separately We looked at how equilibrium is determined and how demand or supply shocks create disequilibrium
  • 54. Summary We began to study how markets operate by comparison/contrast with a simple abstract model of a “perfectly competitive” We emphasized its simplicity, its abstract and mechanical character We fitted the topic in the context of our course’s goals We laid out a strategy to build the model We looked at the demand and supply sides separately We looked at how equilibrium is determined and how demand or supply shocks create disequilibrium We used graphical and tabular analysis, and then algebra
  • 55. Summary We began to study how markets operate by comparison/contrast with a simple abstract model of a “perfectly competitive” We emphasized its simplicity, its abstract and mechanical character We fitted the topic in the context of our course’s goals We laid out a strategy to build the model We looked at the demand and supply sides We looked at how equilibrium is determined and how demand or supply shocks create disequilibrium We used graphical and tabular analysis, and then algebra Next, we’ll use the simple model in applications and extend it
  • 56. Exercises