Lecture 2 and 3: Demand, Supply & Markets

Lecture Objectives:

1. To define markets2. 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 xP0 is the price of related goods

Y is real household incomeT 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)

Px

Qdx0

Qdxt = 12 - 2Px

6

12

A Demand Curve

Supply

Supply Functions- formalizing aggregate supplier behavior

Qsxt = f ( Px, Po, C, Tn, Tx, Tp……)

WhereQsx

t is the quantity supplied at time ‘t’ Px is the price of good x

Po is the price of other goodC is the cost of production

Tn is the TechnologyTx 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

Qsx = - 10 + 20Px

P

QO

S0

A SA Supply Curveupply Curve

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

Quantity (bottles: 000s)

E

D

B

A

b

E

d

e

Supply

Demand

SHORTAGE

(300 000)

MMarket equilibriumarket equilibrium

(Vodka: monthly(Vodka: monthly))

Price(Rbs)

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

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