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Lecture 2 and 3: Demand, Supply & Markets
Lecture Objectives:
1. To define markets2. To define & identify the key
determinants of market demand & market supply
3. To define & explain the ‘mechanics’ of markets
What is a Market?
Economic function
- The meeting of people for the purchase/ sale of goods at a fixed time and place
- An open space where goods are exposed for sale
Social function
“there is probably no urban market-place where the interchange of news and opinion did not play almost as important a role as the interchange of goods” (Mumford, L., 1961, The City in History)
Further Characteristics of Markets
Face to face or anonymous?
Face to face interaction needed if…
- products are differentiated- asymmetric information - difficult to obtain- parties require high degree of trust
Numbers of buyers & sellers
- helps define structure of market, e.g. perfect competition or monopoly
- provides insight into conduct of firms
- can be misleading, e.g. “supermarket” may only have 1 provider
DEMAND
• Demand functions……
- formalizing aggregate consumer behavior
We can simplify the demand relationship as follows:
Qdxt = f (Px, P0, Y, T, Ax……..)
Where….
Qdxt is quantity demanded of good x at time ‘t’
Px is the price of good xP0 is the price of related goods
Y is real household incomeT is household taste, and
A is advertising expenditure on product X and so on….
DEMAND
• Other determinants of demand
– tastes– distribution of income– expectations
To simplify a complex world we begin assuming
Qdxt = f (Px)
Px
Qdx0
Qdxt = 12 - 2Px
6
12
A Demand Curve
Supply
Supply Functions- formalizing aggregate supplier behavior
Qsxt = f ( Px, Po, C, Tn, Tx, Tp……)
WhereQsx
t is the quantity supplied at time ‘t’ Px is the price of good x
Po is the price of other goodC is the cost of production
Tn is the TechnologyTx is the tax rate
Tp is the taste of producers and so on…
Supply• Other determinants of supply
– nature and other random fluctuations
– aims of producers
– expectations of producers
Qsx = - 10 + 20Px
P
QO
S0
A SA Supply Curveupply Curve
Shift in Supply Curve
Price of one Bottle of Vodka
Producers’ Willingness to Sell (Quantity Supplied)
‘000 bottles
Customers’ Willingness to Buy (Quantity Demanded)
‘000 bottles
Rs. 20 700 100
Rs. 16 500 200
Rs. 12 350 350
Rs. 8 200 500
Rs. 4 100 700
Quantity (bottles: 000s)
E
D
B
A
b
E
d
e
Supply
Demand
SHORTAGE
(300 000)
MMarket equilibriumarket equilibrium
(Vodka: monthly(Vodka: monthly))
Price(Rbs)
Student Tasks:
a) Show what happens if income rises in the above market
b) Show what happens if the Mauritian Government adds a tax on suppliers
c) How does your answer to a) change if Stalinski Vodka is highly addictive?
Production Frontier
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