Supply and demand

Supply and demand - Competitive Market Model Objectives...

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1 Competitive Market Model Objectives Describe the purpose of a market/functions of price. Explain the underlying assumptions. Explain how a change in the determinants of Supply/Demand causes a shift or move along that curve Given an event, explain –in 4 steps - how it lead to a new new equilibrium.
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2 Goals of the Economic System To do the 3 basic tasks as well as possible: Society wants to use its resources to get the most possible benefits Produce efficiently (least resources per good) Allocate resources efficiently (most beneficial amount of each good, considering its opportunity cost) Distribute efficiently (so that people get what benefits them the most, given what is produced)
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3 Can this be done by Markets?   Our economic system relies to a large degree on markets to perform these tasks. In the first half of this course, we will take a very close look at how markets work . We create a “model” of a “competitive” market which, at least in theory, works quite well. In the second part of the course, we look at conditions in which markets do not work well (“market failure”) – which is the fun stuff!
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4 What is a market? A system in which exchanges take place Has Buyers and Sellers All markets work in a similar way, but here we will study markets for consumer good Firms that supply Consumers that buy Later on we will look at labor and financial markets: The same principles apply but they are more complicated. Supply and demand’ models the perfectly competitive market. Later, we model other types of markets.
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5 Coordinating Costs and benefits The production of each good involves giving up something else (the tradeoff/opportunity cost) To be optimal (give society the most benefits) how much we produce of each good would have to weigh the opportunity cost of producing the good against the benefits obtained from consuming the good Note: this is just the marginal cost/benefit decision
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6 Challenge of Coordination So, how can society coordinate the decisions of millions of consumers and producers? Huge problem: How to find out the information How to figure out how/what to produce How to motivate producers to do it Econ Principle: Markets do this amazingly well: Prices are the key.
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7 Functions of Market Price The market model assumes that price is determined in the market: not controlled by seller or buyers In many markets that are not perfectly competitive, producers may provide some difference allow a price premium, but the market works largely the same. In a market, prices work as: 1. Signals: 2. Incentives: 3. Rationing mechanism
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8 Price is a signal Supply response tells consumers the opportunity cost of producing the good Demand response tells producers the benefits of the good Changes in Supply or Demand cause Surpluses or shortages Surpluses or shortages signal that price is too low or too high Market contains forces that push price to correct the signal 1. Price is a Signal
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Supply and demand - Competitive Market Model Objectives...

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