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ECONOMICS
2014 T2
CH 3
Professor Morris Altman
Victoria University Wellington
CHAPTER 3
!2
Whats a market?!
Institutional domain!
Protected by law or custom!
Where individuals trade (voluntary exchange)!
Trade and bargaining generate prices and serve to allocate goods
and services and factor inputs!
Many types of markets; dierent markets for dierent goods &
services and dierent factor inputs!
Also, local, national, and international markets
!3
Demand-side!
Demand curve derived from demand schedule!
Demand curve and schedule: what individuals would be willing
to purchase at alternative prices at a given point in time!
Demand functiondemand is a function of both endogenous
(price of the Qx) and exogenous variables (shift factors)!
Demand function includes price of Qx, price of other goods
and services, expectations, income, etc.!
Qx=f(Px..)
!4
Price
Quantity
!5
!7
Demand curve!
Changes in Dshift in Demand curve.!
Changes in the quantity Dmovement along the
demand curve!
Shift factorsrefers back to the exogenous
variables in the demand function, such as change
in: income, tastes and preferences, expectations.
!8
Supply!
Supply curve and schedule refer to alternative quantities that an individual is willing
to supply (willingness-to-supply (WTS), at alternative prices at a given point in time.!
Typical supply curve modelled in the text book is positively sloped reflecting the
assumption of increasing opportunity cost (OC).!
But the supply curve can take on dierent shapes, especially in the long run.!
Note that OC includes economic profit (normal rate of return)!
!
!
!9
!10
Price determination!
Supply and demand determine market price and quantity and
equilibrium in price and quantity.!
Equilibrium is a point of rest; it is also market clearing; it is a
theoretical construct suggesting where P and Q should end up in
the long run, especially when market are perfect.!
Law of one price: one market clearing price for each and every
market.!
Note that here are dierent markets for similar products:
dierent markets for dierent types of apples, wines, juices,
bottled water, etc.
!12
Surplus
!
Shortage
!13
D0
S0
!
P0
!
Shortage
!14