What is a market?
Market is collection of buyers and sellers that, through their actual or potential interactions,
determine the price of a product or set of products. For example, in a computer market, the buyers
could be firms, households and students;
Questions for Review
2) Draw the cost curves for a typical firm. For a given price, explain how the firm
chooses the level of output that maximizes profit. At that level of output, show on
your graph the firms total revenue and total costs.
From which Greek word(s) is the word economy derived?
One who manages a household
Why do both households and societies face many decisions?
Because resources are scarce
How are goods and services allocated in a market economy?
By the actions of all firms
Questions for Review
2) Draw a supply and demand diagram to explain the effect of a negative externality in
At Q market
H represents the deadweight loss
At Q o
CONSUMER DEMAND THEORY
The mkt. demand curve in perfect compt is sloping
ie, X1 = f (p1)
HH consumption behaviour allows us to derive the
individuals demand curve. Once we have this, we can SUM
over all HHs
REVEALED PREFERENCE THEORY
- looks at information about consumer demand
in order to obtain information about consumer
This is the converse to what we have been
considering up to this point
until now we have used prefer
HHs beh. rule:
MAX U (x1, x2) s/t p1 x1+ p2 x2 M
HHs chose the best bundle of goods that
they can afford.
We can now put the concept of the
budget constraint & consumer preferences
together in order to obta
CONSMUER DEMAND THEORY
Recall the fundamental assumption in the
econ. model of consumer behaviour:
Consumers will choose the best bundle
of goods that they can afford.
- the objects of consumer
The DEMAMD FN gives the optimal amt. of a
particular good as a function of prices & income
x1* = x1 (p1, p2, M)
x2* = x2 (p1, p2, M)
endogenous variable is a fn of the exogenous
- considers 2 equi
xi1 (p1, p2, mi) = consumer is demand fn for good 1
xi2 (p1, p2, mi) = consumer is demand fn for good 2
Suppose: n consumers
The MARKET DEMAND (or Aggregate Demand) for good
1 is the sum of the individual demands for this
HHs beh. rule:
MAX Utility s/t their budget constraint
UTILITY (U) is a way to describe
- is a way of assigning numbers to every
possible consumption bundle such that more
preferred bundles are assigned l
Chapter 2: Thinking like an
The Circular-Flow Diagram
Produce and sell goods and services
Hire and use factors of production
Buy and consume goods and services
Own and sell factors of production
The limited nature of society's resources
The study of how society manages its scarce resources
The property of society getting the most it can from its scarce resources
The property of distributing economic prospe
Infinitely elastic demand is principle that consumers will buy as much of a good as they can get at
a single price, but for any price higher the quantity demanded drops to zero, while for any lower
price quantity demanded increase without limit.
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Chapter 3- Questions for Review:
3) Give an example in which one person has an absolute advantage in doing something but another
person as a comparative advantage.
One guy is an amazing fry cook and can perform heart surgery. His neighbour is an ok fry co
There would be a surplus of 400 units.
4. What could happen at a price of $15?
What are the equilibrium price and quantity?
$35 and 200
$35 and 600
$25 and 400
$15 and 200
2. What would happen at a price of $35?
a. A shortage would exist