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Lecture 2 and 3: Demand, Supply & Markets Lecture Objectives: 1. To define markets 2. To define & identify the key determinants of market demand & market supply 3. To define & explain the ‘mechanics’ of markets What is a Market? Economic function - The meeting of people for the purchase/ sale of goods at a fixed time and place An open space where goods are exposed for sale Social function “there is probably no urban market-place where the interchange of news and opinion did not play almost as important a role as the interchange of goods” (Mumford, L., 1961, The City in History) Further Characteristics of Markets Face to face or anonymous? Face to face interaction needed if… - products are differentiated - asymmetric information - difficult to obtain - parties require high degree of trust Numbers of buyers & sellers - helps define structure of market, e.g. perfect competition or monopoly - provides insight into conduct of firms - can be misleading, e.g. “supermarket” may only have 1 provider DEMAND • Demand functions…… - formalizing aggregate consumer behavior We can simplify the demand relationship as follows: Qdxt = f (Px, P0, Y, T, Ax……..) Where…. Qdxt is quantity demanded of good x at time ‘t’ Px is the price of good x P0 is the price of related goods Y is real household income T is household taste, and A is advertising expenditure on product X and so on…. DEMAND • Other determinants of demand – tastes – distribution of income – expectations To simplify a complex world we begin assuming Qdxt = f (Px) A Demand Curve Px Qdxt = 12 - 2Px 6 0 12 Qdx Supply Supply Functions - formalizing aggregate supplier behavior Qsxt = f ( Px, Po, C, Tn, Tx, Tp……) Where Qsxt is the quantity supplied at time ‘t’ Px is the price of good x Po is the price of other good C is the cost of production Tn is the Technology Tx is the tax rate Tp is the taste of producers and so on… Supply • Other determinants of supply – nature and other random fluctuations – aims of producers – expectations of producers A Supply Curve P S0 Qsx = - 10 + 20Px O Q Shift in Supply Curve Price of one Bottle of Vodka Producers’ Willingness to Sell (Quantity Supplied) ‘000 bottles Customers’ Willingness to Buy (Quantity Demanded) ‘000 bottles Rs. 20 700 100 Rs. 16 500 200 Rs. 12 350 350 Rs. 8 200 500 Rs. 4 100 700 Price (Rbs) E Market equilibrium (Vodka: monthly) e Supply d D E b SHORTAGE B (300 000) A Demand Quantity (bottles: 000s) Student Tasks: a) Show what happens if income rises in the above market b) Show what happens if the Mauritian Government adds a tax on suppliers c) How does your answer to a) change if Stalinski Vodka is highly addictive? Production Frontier Activity Activity Activity Activity Activity