ec111_lecture2

1、1EC111 Introduction to Economics 2012/13 EC111 Introduction to EconomicsLecture Outline:- Demand and Supply. Equilibrium price in a Competitive Market;- Elasticity;- Government intervention;Essential reading:Begg et al:

2、Chs. 3, 4 (Skim chapter 2 to maintain continuity only) or Sloman and Wride Chs. 2, 31) Competitive Market: Demand and SupplyWhen asked, “What is the most important thing you know about economics?” many people reply, “S

3、upply equals Demand”. This statement is a shorthand description of one of the simplest yet most powerful models of economics.The supply and demand model describes how consumers (buyers) and suppliers (sellers) interact i

4、n a market to determine the quantity sold of a good or service and the price at which it is sold.We are going to consider the demand and supply in a particular market: a perfectly competitive market.Definition: a market

5、consists of the buyers and sellers of a good or service.A perfectly competitive market is a market where the following assumptions are satisfied:a) Everyone is a price taker: this is a very important assumption. No consu

6、mer or firm is a very large part of the market, so no one can affect the market price. Think for example to a market in which there are many consumers and many firms. Since there are many consumers, each consumer can be

7、considered as a small part in the market, and the same for a firm.b) Firms sell identical products: no consumer prefers one firm’s good to another. We say that products are homogenous in this case.Lecture 23b) Tastes: ta

8、stes will determine what a consumer should consume. For example, it is likely that demand for Steak and Kidney pie is higher in UK than in Italy.c) Prices of other goods: in general the quantity demanded of a good sold i

9、n a market depends also on the prices of other goods that can be viewed as substitutes. For example the demand for Coca-cola may depend on the price of Pepsi. If the price of the Pepsi increases while the one of the Coca

10、-cola remains constant, some consumers that use to buy Pepsi may switch and consume Coca-cola if they feel that the two products are close substitutes. Furthermore, the price of a complement – a good that you like to con

11、sume at the same time as the product you are considering buying – can affect the demand of a given good. For example, if you eat pie only with ice cream, the higher the price of ice cream, the less likely you are to buy

12、pie.d) Expectations: people’s expectations about future income and future price levels can affect their current purchase decisions. For example, if you think that the price of a good is going to increase sharply in the n

13、ear future you may want to buy it today.e) Government regulation: government may pose limits to the amount produced of a good. It can set up rules to affect the final price that consumers are going to pay, etc. etc.All t

14、he elements listed above can affect the quantity demanded of a given good or service. However in our analysis we will consider only the price of a good as the main determinant of the quantity demanded. Therefore, we will

15、 consider the factors from a) to e) AS GIVEN. Therefore, a demand function tells us the amount of a good or service that consumers are willing to buy at a given price HOLDING CONSTANT the other factors that can influence

16、 purchases (this is the meaning of the expression ceteris paribus that you find sometimes written in books).How it looks like the relationship between quantity and price implied by the demand function.In economics we hav