Lec03 - Market Economy u u Market economy u economy in...

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1 Market Economy u Market economy u economy in which questions concerning resource allocation are primarily determined by the interaction of consumers, firms and the government in markets u “pervasive system of free exchange that coordinates economic activity to yield outcomes in production and distribution that are, with some exceptions, better than can be achieved by other methods” The Market u Adam Smith (1723-1790) moral philosopher, pointed out virtues of market u The Wealth of Nations u “He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. . .., he intends only his own security; . .., he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.” u Goal --- construct a basic and powerful model that explains the determination of price and quantity bought and sold u model of demand and supply u demand, supply, market equilibrium Demand and Supply
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2 Demand Curve Price Quantity Demanded 2 9 6 7 10 5 14 3 18 1 0 2 4 6 8 10 12 14 16 18 20 0 1 2 3 4 5 6 7 8 9 10 Quantity Price D u when price increases, the quantity demanded falls u law of downward sloping demand u change in quantity demanded refers to movement along the demand curve u demand --- the amount of a good people are willing to buy u demand curve --- relationship between the price of a good and the quantity demanded, all other things being equal Shifting the Demand Curve u change in demand refers to shift of demand curve u increase in demand u rightward shift u quantity demanded higher at every price u some other thing is not equal u demand --- the amount of a good people are willing to buy u demand curve --- relationship between the price of a good and the quantity demanded, all other things being equal D Quantity Demanded Price Shifting the Demand Curve u change in demand refers to of demand curve u demand --- the amount of a good people are willing to buy u demand curve --- relationship between the price of a good and the quantity demanded, all other things being equal u increase in demand u u quantity demanded higher at every price u some other thing is not equal decrease leftward lower Quantity Demanded Price D
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3 Shifting the Demand Curve u demand depends on the following variables u changes in these variables shift the demand curve Quantity Demanded Price tastes change good more desirable u consumers’ preferences D Shifting the Demand Curve u
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Lec03 - Market Economy u u Market economy u economy in...

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