ECC1000 Lecture Notes - Lecture 2: Perfect Competition, Substitute Good, Economic Equilibrium
Topic II: Introduction to Perfectly Competitive Markets
Week 2 To do: Read Chap 4 , Complete Aplia test by Sunday 23:30
Why the Falling Oil Price isn’t Hurting Markets
●There is an excess in supply NOT a fall in demand therefore the supply increase
brings down the price of oil - This is actually good news as opposed to the decrease in
demand that led to the decrease in price.
Outline
●Discussion of the most important (most common) resource allocation mechanism:
markets
●What is a market?
●What is a (perfectly) competitive market?
○Types of market: monopoly, oligarchy, competition
●Competitive Market Model (Demand, Supply and Market Equilibrium)
What is market?
●A place (physical or not) where buyers (demand) and sellers (supply) meet for a
particular good or service
●The two sids interact to determine the prices and quantities exchanged, called the
market equilibrium
●Markets are perhaps the most important and ancient social institutions in the world
●Markets are everywhere (even when people try to stop them)
○Eg: Black market, human organs, electronic ban, trade bans etc
(Perfectly) Competitive Market
●The goods being ordered for sale are perfect substitutes (to the buyer, all the goods
are the same)
●There are so many buyers and sellers so that no single buyer or seller can influence
the market price (they are price takers)
○Someone who makes the price = price makers
●No market is perfectly competitive, but many markets are quite competitive
●Eg: markets for agricultural products, markets for very liquid financial securities
●In these markets, all relevant information is summarized in demand and supply
Introduction to the Competitive Market Model (DSE)
Demand
●Quality demanded = amount of a good that a buyer is willing
and able
to purchase
●A person’s demand (schedule, curve, function) relates the person’s quantity
demanded
to the price
of a good, holding all other relevant factors fixed
○Distinction between quantity demanded (how much consumer will buy at
any price - moves along the demand curve) and demand (how much consumer
will buy at a certain price - shifts the demand curve)
●Law of demand: other things equal (ceteris paribus), the quantity demanded of a
good (generally) falls when the price of the good rises (ie demand curve generally
slopes down)
Individual Demand
●
●
●Note: Price is on the vertical axis!
Market Demand
●If we add up each individual’s demand at a particular price, we obtain the total
market demand at that price
●If we do this for every possible price, then we derive the market demand curve
●Market demand is a horizontal sum of individual demands
Market Demand Curve
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●
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Document Summary
Week (cid:545) to do: read chap (cid:547) , co(cid:299)plete aplia test by )u(cid:300)day (cid:545)(cid:546):(cid:546)(cid:543) Why the falling oil price isn"t hurting markets. Discussion of the most important (most common) resource allocation mechanism: markets. Competitive market model (demand, supply and market equilibrium) A place (physical or not) where buyers (demand) and sellers (supply) meet for a. The two sids interact to determine the prices and quantities exchanged, called the particular good or service market equilibrium. Markets are perhaps the most important and ancient social institutions in the world. Markets are everywhere (even when people try to stop them) Eg: black market, human organs, electronic ban, trade bans etc (perfectly) competitive market. The goods being ordered for sale are perfect substitutes (to the buyer, all the goods. There are so many buyers and sellers so that no single buyer or seller can influence are the same) the market price (they are price takers ) Someone who makes the price = price makers.