Lecture 5Outline of Last LectureI. Economic Systemsa. Differ based onb. Market systemc. Command system II. Key Characteristic of the Market System III. Read from TextbookIV. The curious case from Cubaa. NPR radio storesOutline of Current Lecture I. Circular Flow ModelII. Chapter 3: Demand and Supplya. Objectivesb. Define MarketIII. An assumption for this chaptera. Markets exhibit perfect competitionIV. DemandV. Law of Demand Current LectureI. Circular flow model a. A model of a nation’s economy’ shows circular flow of money, factors of production, and goodsi. No government , taxes, or savingsii. Households and businesses interact through resource and product markets iii. How interactions take place within an economy iv. Businesses1. Buy resources2. Sell productsv. Product Market1. Businesses sell2. Households buyvi. Households1. Sell resources2. Buy productsvii. Resource market1. Households sell2. Businesses buy viii. Businesses and households interact with each otherix. Figure 2.2II. Chapter 3: Demand and Supply a. Objectivesi. Define demand (supply) and explain the law of demand (supply)ii. Identify factors that affect demand for (supply of) a commodityARE 1150 1nd EditionLecture 5iii. Interpret equilibrium price and quantity and explain rationing function of prices iv. Define productive efficiency and allocative efficiencyv. Analyze the effect of government intervention on the equilibrium in competitive marketvi. Apply supply-demand analysis to real-world situations b. Market = institution that facilitates interaction between buyers and sellersi. Does not need to be a physical placeii. Buyers and sellers do not always haggle to arrive at the price III. An assumption for this chaptera. Markets exhibit perfect competitioni. Large number of independently actin buyers and sellers dealing in a standardized product ii. Example: market for tomatoes is an example of perfect competition because 1. There are a lot of consumers looking for tomatoes 2. There are a large number of sellers3. The product is standardized 4. Not interaction between buyer and seller IV. Demanda. Demand schedule and demand curveb. Quantity that consumers are willing and able to purchase at a give pricei. “other things equal” assumptionii. individual demand vs. market demandc. When the price decreases it is expected that the quantity demanded will increaseV. Law of demanda. Other things equal, as price falls quantity demanded risesb. Explanationsi. Common sense!ii. Diminishing marginal utility1. Marginal utility = the amount that utility increases with an increase of one unity of an economic good or service2. Utility can mean satisfaction 3. Example: pizza slices a. Price is the independent variable b. The number of slices consumed depends on the priceiii. Income effectiv. Substitution effectv. Read about the last two from the textbookARE 1150 1nd