MARKETS
Principles of Microeconomics
Prof. Johannsen
1
KEY IDEAS
What, how and for whom?
Command and Market Systems
Demand Curve
Supply Curve
Market Equilibrium
2
WHAT, HOW, AND FOR WHOM?
What goods and services should we produce?
How should we use our resources to produce them?
Who will the goods and services be distributed to?
- Money, barter, government distribtuion
3
ECONOMIC SYSTEMS
Command System: a centrally planned economy where the government decides what, how and for
whom.
- Government owns most of resources and businesses.
- Socialism and Communism.
- Soviet Union was most like a pure command economy before its collapse in 1992.
Laissez-Faire Capitalism: the government’s role is limited to protecting property rights and creating
a legal system to create and enforce contracts.
- Hypothetical only with no examples of pure capitalist economies.
Market Economy: capitalism or mixed-economy where the government provides economic structures
and market regulations, but allows private ownership and the actions of buyers and sellers to decide
what, how and for whom.
- Private property ownership.
- Most economies are market economies with varying levels of government control.
4
PROBLEMS
Command System
Coordination Problem
- Government must know what all buyers and sellers “want” and must be able
to align wants between all members of society.
- Becomes more difficult as the economy grows
Incentives Problem
- Persistent shortages and surpluses
- Central planning does not trigger the “profit” motive
LAISSEX-FAIRE System
Externalities
Monopolies
Fraud
5
CHARACTERISTICS OF THE MARKET SYSTEM
Private Property
Freedom of Enterprise and Choice
Self-Interest
Competition
Division of Labor
Active but limited government
6
BUYERS AND SELLERS
Market: All buyers and sellers of a particular good or service
Individual product, product category, place, entire economy
Why do brown eggs usually cost more than white eggs?
Willingness to pay (or accept)
7
DEMAND CURVE
Schedule or graph
Downward sloping
Substitution effect
Income effect
Reservation Price
Law of demand: as the price
falls the quantity demanded rises.
8
CLASS DEMAND FOR COCA COLA
How much would you be willing to pay for an ice-cold 12oz can of
coca cola (or water if you hate coke!)?
-Hot day
-Stuck outside in the sun for the next 3 hours
-You have no other beverages available
-How would your answer be different if you
were at Disneyland?
9
SHIFTS IN DEMAND
Complements
Substitutes
Income
Tastes/Preferences
Population
Expectations about future prices
10
SUPPLY CURVE
Schedule or graph
Upward sloping
Reservation Price
11
SHIFTS IN SUPPLY
Input prices
Technology
Substitutes in production
Weather
Number of suppliers
Expectations about future prices
12
SHIFT OR MOVEMENT?
Change in Demand: Entire curve shifts to the left or right
Change in Quantity Demanded: moving to another point on
the same demand curve.
Change in Supply: Entire curve shifts to the left or right
Change in Quantity Supplied: moving to another point on
the same supply curve.
13
MARKET EQUILIBRIUM
Market Equilibrium
-Q Supply = Q Demand
- Buyers and Sellers have same
reservation price for a certain Q
- What is the market equilibrium
price and quantity for Smartwatches?
The equilibrium is the most efficient price and
quantity. It leads to the maximum economic
surplus.
Fig. 3.3 The equilibrium quantity and price of a product are the
values that correspond to the intersection of the supply and
demand curves for that product.
14
MARKET EQUILIBRIUM
Stable equilibrium where prices will
adjust if set too high or too low.
Surplus: when prices are above P*. There
will be more sellers than buyers and prices
will fall.
Shortage: when prices are below P*.
There will be more buyers than sellers and
prices will rise.
15
EFFICIENCY AND EQUILIBRIUM
Market Equilibrium represents the highest level of overall economic surplus.
-If all costs and benefits are accounted for in the Supply and Demand curves.
Economic Surplus: the difference between price paid and reservation price.
Not an economic loss if you do not purchase a good or service.
Voluntary exchange.
The Invisible Hand: Households and firms working in their own self-interest will
simultaneously promote the interests of society.
16
BOTH CURVES SHIFTING
17
SOLVING THE MARKET EQUILIBRIUM WITH ALGEBRA
Demand Curve: P= 16 – 2Qd
Supply Curve: P = 4 + 4Qs
Qd: quantity demanded
Qs: quantity supplied
Q*: equilibrium quantity
(1) Set the S&D curves equal to each other
P*: equilibrium price
•16 – 2Q* = 4 + 4Q*
(2) Solve for Q*
• 12 = 6Q*
• Q*=2
(3) Plug in Q* to either S or D equations and solve for P
• P= 16 – 2(2)
• P*=12
18
PRICE CONTROLS
When prices are set by the government above or below the market
equilibrium price.
This happens when market prices
are considered “unfair”.
Price Ceiling: Maximum price
- Rent Control
Price Floor: Minimum price
- Minimum wage
Rationing
Black Markets
19
0
