chap 4 lect notes

chap 4 lect notes - The circular-flow model The market...

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1 The market forces of supply and demand Chapter 4 The circular-flow model Market for Goods and Services Market for Factors of Production Firms Households Wages, rent, and profit Income Revenue Spending Inputs for production Labor, land, and capital Goods and services sold Goods and services bought Market ± A market is a group of buyers and sellers of a particular good or service. ² An “institution” that facilitates exchange ² Rules related to the institution may be formal or informal ± Government regulation ² SEC; industry regulations ± Contractual agreements ² eBay; Auctions for oil leases Individual vs. aggregate behavior ± Individual behavior ² Buyers determine demand ² Sellers determine supply ± Aggregate behavior ² Market demand ² Market supply Market types ± Markets differ in terms of characteristics: Product differentiation, number of sellers, ease of entry ² Perfect Competition ² Monopoly ² Oligopoly ² Monopolistic Competition Competitive markets ± Many buyers and sellers ± Not controlled by any one person or firm ² No individual or firm has “market power” on the demand side ² No individual or firm has “market power” on the supply side ± A narrow range of prices is established
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2 The concept of demand For an individual ± Quantity demanded ² a function of the price and other variables ± Willingness to pay ² a function of the quantity demanded and other variables Price Quantity demanded Willingness to pay Quantity demanded Law of demand The role of price in determining the quantity demanded is powerful. ± Other things being equal ( ceteris paribus ) we expect the quantity demanded of a good to decrease when its price rises. ² Conversely, we expect the quantity demanded of a good to increase when its price falls. The concept of demand Law of demand ² There is an inverse relationship between price (or willingness to pay) and quantity demanded . ) 4 , 3 , 2 , 1 ; ( x x x x q f p = p q p b p a q a q b Demand function Demand curve Demand for ice cream Price of Ice-Cream Cone 1.50 2.00 2.50 $3.00 1.00 0.50 0 1234567891 01 1 1 2 Quantity of Ice-Cream Cones Price Quantity Demanded per week $0.00 12 0.50 10 1.00 8 1.50 6 2.00 4 2.50 2 3.00 0 Demand Schedule The market demand curve Price of Ice- Cream Cone Price of Ice- Cream Cone Price of Ice- Cream Cone 2.00 2.00 2.00 4 3 7 1.00 1.00 1.00 8 5 13 Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones Catherine’s Demand Nicholas’ Demand Market Demand + = The market demand curve is the horizontal sum of the individual demand curves! The concept of supply ± Quantity supplied is the amount of a good that sellers are willing and able to sell – at a given price. ² How much does it cost to produce the good? ² What is the extent of competition faced by the seller?
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3 Determinants of supply For an individual firm ± Law of supply ² There is a direct (positive) relationship between price and quantity supplied.
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This note was uploaded on 05/09/2008 for the course ECON 0100 taught by Professor Kenkel during the Spring '08 term at Pittsburgh.

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chap 4 lect notes - The circular-flow model The market...

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