4. What is a market?
Each household and firm do all of their buying
and selling activities in a market.
Each household and each firm operates in
many markets, sometimes as a buyer, and
sometimes as a seller.
6. Single Market
Imagine that
There is a Commodity X Market and there are
many firms that potentially supply the
commodity X, and there are many households
that are potential consumers of the commodity
X.
Firms bring their supplies of X to the market and
households make their purchase of X.
7. Households and Firms
Households are the consumers
Firms are the producers
Firms produce the commodity X
Households purchase the commodity X
8. Demand
Demand shows consumers’ willingness to buy
specific goods and services at a specific price
level and also the quantity of the goods and
services that is wanted by the consumers.
By household demand for X we mean the
quantity of the good households wish to
purchase at a P.
9. Demand
What affects demand?
Income
Tastes and preferences
Relative Prices of other goods and
services
Consumer expectation of future
pricing
10. Demand Curve
The slope of the demand curve is negative because when
price increases the quantity demanded decreases, and
when price decreases the quantity demanded increases.
Price(P)
Quantity (Q)
D
D’
11. Supply
Supply shows the producers willingness to sell
specific goods and services at a specific price
level, and also the quantity of the goods and
services produced by the producers.
By a firms supply of X at P we mean the
quantity it would be willing to sell at P.
13. Supply Curve
The slope of the supply curve is upward because when
price increases there is an increase in supply.Price(P)
Quantity (Q)
S
S’
14. Market Equilibrium for Commodity XPrice(P)
Quantity (X)
S
S’
E
PE
XE
Point E = equilibrium point of
the market for X
The demand curve and the
supply curve of X intersects at
point E
PE = the equilibrium price
XE = the equilibrium quantity
15. Equilibrium of Interdependent
Markets
A market equilibrium (competitive
equilibrium) is a set of prices quoted today
for each and every commodity, such that the
total demand for each equals its total supply.
Equilibrium prices coordinate the production
and allocation of all goods and services.
16. Price Mechanism
When demand increases and supply stays the
same equilibrium prices will rise.
When demand decreases and supply stays the
same equilibrium prices will go down.
17. Price Mechanism
If demand stays the same and supply increases
equilibrium prices will decrease.
If the demand stays the same and supply
decreases equilibrium prices will increase.
