Econ 201 1st Edition Lecture 13Outline of Last Lecture 1. Equilibrium 2. Analysis shifOutline of Current Lecture 1.Basic market2.supply and demand changeCurrent LectureWhat Is a Market?• A Market is not a place. • A Market is: – 1. A collection of individual actors interacting through exchanges (buyers and sellers)And– 2. The rules that govern their interactions. • Markets are social institutions ~ guides for social behavior.Social Role of Markets• Markets promote social cooperation ~ help avoid conflict.• Markets promote productive and allocative efficiency.– Markets help an economy attain the correct point on the PPF. • They do this by:These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.1. Allowing specialization according to Comparative Advantage.2. Efficiently processing information on productive opportunities (Supply) and social needs (Demand). è Prices are the processed information.3. Coordinating complex, multi-stage production chains that characterize a modern industrialized economy. è Incentives guide individuals’ behavior toward cooperation.Conditions for a Competitive Market1. Many buyers and sellers No one influences price significantly; participants are Price Takers.2. Free access to relevant information by allInformation about production technology and prices. 3. Homogeneous commodity is the object of trading.Each seller offers the same product/service. 4. Free entry and exit from the marketExit is almost always available. Entry may be difficult. If so, the market is not competitive.Supply and Demand are Relationships ~ Not Quantities• Law of Demand: Actors buy more at a lower price. Negative relationship• Law of Supply: Actors sell more at a higher price. Positive relationship• Both laws assume Ceteris Paribus condition ~ All other things constant.• Distinguish changes in the relationships from changes in the quantities.– For both Demand and SupplyWhy do Supply and Demand Shift?Supply shifs occur when underlying conditions that affect seller behavior change. (Variables other than Price of the good.)Demand shifs occur when underlying conditions that affect buyer behavior change. (Variablesother than Price of the good.)Key Seller InfluencesNumber of sellers (NS)Prices of inputs (W)Transaction costsTechnology of productionExpectationsKey Buyer InfluencesNumber of buyers (NB)Income (M)Prices of other goods: Substitutes (PX) Complements (PY)TastesExpectationsComparative Statics ~ Analysis of Market Changes• How do changes in underlying conditions affect market equilibrium?• Three steps to Comparative Statics Analysis1. Determine which curve to shif. (S or D)2. Determine the direction of shif. (Lef or Right)3. Examine impact on equilibrium point (the intersection). Increase or Decrease of Q*? Increase or Decrease of P*?• Example Suppose the price of gasoline falls. What happens in the market for tires?• Demand shifs right; supply is not changed. Q* and P* both
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