Market modeljuliohuato@gmail.com

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!

Markets Premise: private ownership over goods

(“commodities”) Markets for

regular goods (e.g. oranges, bread, computers, cars, houses) &

productive resources (L, K & NR)

Section goals For the section: to learn about how

actual markets operate by comparison/contrast with a simple, competitive market under a few idealized conditions

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”)

Model-building strategy 1. 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)

DemandKQ: What makes buyers buy more/less of a given good?

DemandKQ: What makes buyers buy more/less of a given good? Price of the good

DemandKQ: What makes buyers buy more/less of a given good? Price of the good Income/wealth of buyers

DemandKQ: What makes buyers buy more/less of a given good? Price of the good Income/wealth of buyers Tastes of buyers

DemandKQ: What makes buyers buy more/less of a given good? Price of the good Income/wealth of buyers Tastes of buyers Prices of other goods

DemandKQ: What makes buyers buy more/less of a given good? Price of the good Income/wealth of buyers Tastes of buyers Prices of other goods Expectations about the above Etc.

Demand

Movement along the curve(the quantity demanded increases)

Demand

Rightward shift of the whole curve(the demand increases)

SupplyKQ: What makes sellers sell more/less of a given good?

SupplyKQ: What makes buyers buy more/less of a given good? Price of the good

SupplyKQ: What makes buyers buy more/less of a given good? Price of the good Cost of producing the good

SupplyKQ: What makes buyers buy more/less of a given good? Price of the good Cost of producing the good

Price of inputs

SupplyKQ: What makes buyers buy more/less of a given good? Price of the good Cost of producing the good

Price of inputs Technology

SupplyKQ: What makes buyers buy more/less of a given good? Price of the good Cost of producing the good

Price of inputs Technology

Prices of other goods

SupplyKQ: What makes buyers buy more/less of a given good? Price of the good Cost of producing the good

Price of inputs Technology

Prices of other goods Expectations about the above Etc.

SupplyMovement along the curve(the quantity supplied increases)

Supply Shift of the whole curve(the supply increases)

Market equilibriumAt a given point in time and for given demand and supply curves, the market is said to be in equilibrium when buyers and sellers find a price at which the quantity demanded and the quantity supplied are equal: Thus, a market equilibrium is a pair of objects . It is both1. an equilibrium price () and2. an equilibrium quantity ().

Market equilibrium

Finding equilibrium

Glut =

Finding equilibrium

Shortage =

Market equilibrium

Demand shock

Supply shock

Demand & supply schedulesPrice

($/unit)

Quantity demanded

(units)

Quantity supplied (units)

Glut or shortage

A 10 100 400 300

B 9 150 350 200

C 8 200 300 100

D 7 250 250 0

E 6 300 200 100

F 5 350 150 200

D 4 400 100 300

Demand & supply schedules

Demand & supply schedulesPrice

($/unit)

Quantity demanded

(units)

Quantity supplied (units)

Glut or shortage

A 10 100 400 300

B 9 150 350 200

C 8 200 300 100

D 7 250 250 0

E 6 300 200 100

F 5 350 150 200

D 4 400 100 300

Algebra

Demand equation

Algebra𝑝=12− .02𝑄𝑑

𝑄𝑑=600−50𝑝(“inverse demand”)

(usual form)

Demand equation

Supply equation

Algebra𝑝=12− .02𝑄𝑑

𝑄𝑑=600−50𝑝(“inverse demand”)

(usual form)

𝑝=2+.02𝑄𝑠(“inverse supply”)(usual form)𝑄𝑠=−100+50𝑝

Demand equation

Supply equation

Equilibrium

Algebra𝑝=12− .02𝑄𝑑

𝑄𝑑=600−50𝑝(“inverse demand”)

(usual form)

𝑝=2+.02𝑄𝑠(“inverse supply”)(usual form)𝑄𝑠=−100+50𝑝

𝑄𝑑=𝑄𝑠

Demand equation

Supply equation

Equilibrium

Algebra𝑝=12− .02𝑄𝑑

𝑄𝑑=600−50𝑝(“inverse demand”)

(usual form)

𝑝=2+.02𝑄𝑠(“inverse supply”)(usual form)𝑄𝑠=−100+50𝑝

𝑄𝑑=𝑄𝑠

600−50𝑝=−100+50𝑝

Demand equation

Supply equation

Equilibrium

Algebra𝑝=12− .02𝑄𝑑

𝑄𝑑=600−50𝑝(“inverse demand”)

(usual form)

𝑝=2+.02𝑄𝑠(“inverse supply”)(usual form)𝑄𝑠=−100+50𝑝

𝑄𝑑=𝑄𝑠

600−50𝑝=−100+50𝑝

Demand equation

Supply equation

Equilibrium

Algebra𝑝=12− .02𝑄𝑑

𝑄𝑑=600−50𝑝(“inverse demand”)

(usual form)

𝑝=2+.02𝑄𝑠(“inverse supply”)(usual form)𝑄𝑠=−100+50𝑝

𝑄𝑑=𝑄𝑠

600−50𝑝=−100+50𝑝

Demand equation

Supply equation

Equilibrium

Algebra𝑝=12− .02𝑄𝑑

𝑄𝑑=600−50𝑝(“inverse demand”)

(usual form)

𝑝=2+.02𝑄𝑠(“inverse supply”)(usual form)𝑄𝑠=−100+50𝑝

𝑄𝑑=𝑄𝑠

600−50𝑝=−100+50𝑝

Demand equation

Supply equation

Equilibrium

Algebra𝑝=12− .02𝑄𝑑

𝑄𝑑=600−50𝑝(“inverse demand”)

(usual form)

𝑝=2+.02𝑄𝑠(“inverse supply”)(usual form)𝑄𝑠=−100+50𝑝

𝑄𝑑=𝑄𝑠

600−50𝑝=−100+50𝑝

Demand equation

Supply equation

Equilibrium

Algebra𝑝=12− .02𝑄𝑑

𝑄𝑑=600−50𝑝(“inverse demand”)

(usual form)

𝑝=2+.02𝑄𝑠(“inverse supply”)(usual form)𝑄𝑠=−100+50𝑝

𝑄𝑑=𝑄𝑠

600−50𝑝=−100+50𝑝

Demand equation

Supply equation

Equilibrium

Algebra𝑝=12− .02𝑄𝑑

𝑄𝑑=600−50𝑝(“inverse demand”)

(usual form)

𝑝=2+.02𝑄𝑠(“inverse supply”)(usual form)𝑄𝑠=−100+50𝑝

𝑄𝑑=𝑄𝑠

600−50𝑝=−100+50𝑝

Demand equation

Supply equation

Equilibrium

Algebra𝑝=12− .02𝑄𝑑

𝑄𝑑=600−50𝑝(“inverse demand”)

(usual form)

𝑝=2+.02𝑄𝑠(“inverse supply”)(usual form)𝑄𝑠=−100+50𝑝

𝑄𝑑=𝑄𝑠

600−50𝑝=−100+50𝑝

Demand equation

Supply equation

Equilibrium

Algebra𝑝=12− .02𝑄𝑑

𝑄𝑑=600−50𝑝(“inverse demand”)

(usual form)

𝑝=2+.02𝑄𝑠(“inverse supply”)(usual form)𝑄𝑠=−100+50𝑝

𝑄𝑑=𝑄𝑠

600−50𝑝=−100+50𝑝

Summary

Summary We began to study how markets operate

by comparison/contrast with a simple abstract model of a “perfectly competitive”

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

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

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

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

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

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

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

Exercises