Lecture on Market Models and Economics

Introduction to Market Models

• Economics studies resource allocation.
• Most resources are allocated by markets, with some by governments.
• Markets can be formal (stores), informal (street corners), or virtual (internet).
• Markets bring buyers and sellers together.

Supply and Demand Model

• Demanders: Buyers
• Suppliers: Sellers
• Assumptions:
  • Many buyers and sellers
  • Firms sell identical products
  • Easy market entry for new firms
• Helps understand price determination and production quantity.

Demand Side

• Focus on buyers
• Price is a major factor affecting demand.
• Demand Schedule: Table of prices and corresponding quantities demanded.
• Demand Curve:
  • Graph of demand schedule.
  • Downward sloping: Lower prices increase quantity demanded.
• Ceteris Paribus: Holding other variables constant when analyzing two variables.
• Law of Demand: Relationship between price and quantity demanded.

Factors Affecting Demand

• Substitution Effect:
  • Consumers switch to cheaper alternatives.
• Income Effect:
  • Purchasing power changes with price changes.
• Other Factors:
  • Income
  • Prices of related goods (substitutes and complements)
  • Tastes, demographics, future price expectations

Shifts in Demand

• Increase in Demand: Demand curve shifts right.
• Decrease in Demand: Demand curve shifts left.
• Factors causing shifts: Income changes, prices of substitutes/complements, etc.

Supply Side

• Focus on sellers
• Price affects supply.
• Supply Schedule: Table of prices and corresponding quantities supplied.
• Supply Curve:
  • Upward sloping: Higher prices increase quantity supplied.
• Law of Supply: Increase in price leads to an increase in quantity supplied.

Factors Affecting Supply

• Inputs
• Technological Change
• Substitutes in Production
• Number of Firms
• Future Price Expectations

Shifts in Supply

• Increase in Supply: Supply curve shifts right.
• Decrease in Supply: Supply curve shifts left.

Market Equilibrium

• Point where supply and demand curves intersect.
• Equilibrium price and quantity are determined at this point.
• Surplus: More supply than demand; puts downward pressure on price.
• Shortage: More demand than supply; puts upward pressure on price.

Analyzing Market Changes

• Three-step approach:
  1. Determine affected curve (supply or demand).
  2. Identify direction of shift (right or left).
  3. Draw the shift and compare new equilibrium.
• Predict price and quantity changes using supply and demand shifts.

Practical Examples and Applications

• Example scenarios:
  • Price of inputs rises.
  • Income changes.
  • Entry of new firms.
• Two Curve Shifts:
  • Occurs when both supply and demand shift.
  • One variable (price or quantity) will be ambiguous.

Conclusion

• Key concepts: Supply and demand curves, equilibrium, and market changes.
• Understanding these models aids in predicting economic behaviors.