Demand Part II

Demand Part II - Demand Part II 1 Supply and Demand Supply...

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1 Demand Part II
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2 Supply and Demand • Supply and demand is an economic model – Designed to explain how prices are determined in certain types of markets • What you will learn in this course – How the model of supply and demand works and how to use it – Strengths and limitations of model
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3 Using Supply and Demand • Supply and demand model is designed to explain how prices are determined in perfectly competitive markets – Perfect competition is rare but many markets come reasonably close – Perfect competition is a matter of degree rather than an all or nothing characteristic • Supply and demand is one of the most versatile and widely used models in the economist’s tool kit
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4 Markets • Specific location where buying and selling takes place, such as – Supermarket or a flea market • In economics, a market is not a place but rather – A group of buyers and sellers with the potential to trade with each other • Economists think of the economy as a collection of individual markets • First step in an economic analysis is to define and characterize the market or collection of markets to analyze
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5 How Broadly Should We Define The Market • Defining the market often requires economists to group things together – Aggregation is the combining of a group of distinct things into a single whole • Markets can be defined broadly or narrowly, depending on our purpose – How broadly or narrowly markets are defined is one of the most important differences between Macroeconomics and Microeconomics
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6 Defining Macroeconomic Markets • Goods and services are aggregated to the highest levels – Macro models lump all consumer goods into the single category “consumption goods” – Macro models will also analyze all capital goods as one market – Macroeconomists take an overall view of the economy without getting bogged down in details
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7 Defining Microeconomic Markets • Markets are defined narrowly – Focus on models that define much more specific commodities • Always involves some aggregation – Stops short of the broad levels of generality that macroeconomics investigates
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8 Buyers and Sellers Buyers and sellers in a market can be – Households – Business firms – Government agencies All three can be both buyers and sellers in the same market, but are not always For purposes of simplification this course will usually follow these guidelines
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Demand Part II - Demand Part II 1 Supply and Demand Supply...

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