Slide 1Main lessonsSlide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 111Chaps 4: Competitive markets- how they work • characteristics of competitive markets• demand • supply• market equilibrium and how to compute it• welfare properties of competitive equilibrium (Chap 7)2Main lessons•Observed market price of a good is determined by _______________________________________ •Determinants of aggregate demand are _____________________________________________•Aggregate supply is determined by ___________________________________________________•Competitive market equilibrium is __________________ _____________________________________________•No other price-quantity combination _____3 Competitive markets- how they work1. Characteristics of a Perfectly Competitive market • • • • 2. A1- A4 implies, firms and consumers are _______________ Price taking behavior implies ____________________________________________________________________________4Determinants of demand demand for a good is ________ related to its ______ positively related to ________ if goods are _________, negatively related if goods are __________examples of positively related to price of substitute goods, negatively related to price of complementary goodsexamples of substitute goods: examples of complementary goods: other factors which affect demand for a good: taste, expectations, number of buyers (size of market)5Law of Demand:The graph of this relationship is called the _________and is a _______ . At each Q on the demand curve the p represents the buyers __________As p rises Q diminishes – a movement described as a ______________. Geometrically _____________________________________________.As income, price of a substitute item or price of a complementary item changes ____________________________________ depending on ___________________________________________. This is described as a ____________________________.decrease (increase) in demand = decrease (increase) in the quantity demanded for any price6Price of the good = Quantity of the good = Q•Do the axes labels look strange?An individual demand curveab7Price of the goodQuantity of the goodA’s demandB’s demandtotal or market demand•Individual demand curves are added horizontally, to get the market demand curves Individual and market demand curves8The individual and market Supply curvesQuantity supplied by individual firm - is ________ related to the price of the good. Why? - is related to prices of inputs. How? other factors? Law of supply: When p increases Q ________ (described as _______________) geometrically supply curve is ______________________; when price of inputs change _________________________________;For a given Q on the supply curve, the corresponding supply price p reflects __________________________________________ Market supply = _____________ of individual supply9Market Equilibrium:pQdemandp1p2a bcd10How to find equilibrium p and Q, given a demand and a supply curve?Q = 2619 – 0.5p, demand curveQ = 10p, supply curve11How do Q* and p* change because of changes in various parameters?Figure out which curve or curves shift. Draw the picture and conclude about the new equilibrium. •As average y (or ps) goes up, the demand curve shifts _________ Supply __________. Equilibrium p* and Q* ___________. • A rise in any input price _________ the cost of production and ________ profits. Hence the supply curve shifts _________ Supply goes _______. Demand _________. Equilibrium p* goes ______, equilibrium Q* goes _____.•Improvement in technology _________ supply, ______ p* and ________
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