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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 marketA 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

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