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Joe Kim

Principles of Microeconomics Demand and SupplyDEMAND AND SUPPLYThis lecture examines the basic DemandSupply model that is central to microeconomics We do so by defining the relationship between Price and Quantity in Demand and Supply without analyzing the cause of those relationshipsWe analyze the cause of the relationships later in the courseWe begin with a definition of Microeconomics and Partial Equilibrium Analysis before explaining the importance of DemandSupply for markets Definition Microeconomics is the study of individual units in an economy households firms markets etc and their relationships This entails the study of the allocation of resources and the distribution of incomeMethodologyModern economics relies heavily on two methodological tools partial equilibrium analysis and atomism Definition Equilibrium is a state of rest with no tendency to change given existing forces variablesDefinition Partial Equilibrium Analysis is the analysis of the relationship between two variables while holding other relevant variables constant ceteris paribusother things equal then examining the effect of the other variables by systematically examining their variation0Example At what temperature does water boilMost people would answer 100 C but in fact this is only true holding at least two other variables constant atmospheric pressure sea level and purity of the water not salty for exampleScientists use partial equilibrium analysis all the time to isolate relationships before they analyze the variations caused by changes in other variables1 Principles of Microeconomics Demand and SupplyDefinition General Equilibrium Analysis is the analysis of the relationship between all variables simultaneouslyWe wont use this approach in this classGeneral Equilibrium analysis is highly prized because it analyzes all the variables at once but this is a disadvantage because it requires more sophisticated mathematics and it doesnt tell us about the causeeffect relationships between specific variablesWe can approximate general equilibrium analysis by relaxing successively relaxing the ceteris paribus assumptions of partial equilibrium analysisDefinition Atomism is the perspective that society whole is the sum of its parts households and firmsModern economics builds theory by analyzing the behaviour of the basic components of consumption households and production firmsDemand is the aggregation of the behaviour of the individual consumers households and Supply is the aggregation of the behaviour of the individual producers firms Late in the course we will examine some of the issues that arise theoretically because of this methodological approach Types of Economic Systems There have been various types of economic systems historically such as patriarchal slave feudal socialist and communisticThis course concentrates on the market systemDefinition Purchase and sale transactions between economic actors households and firms determine the allocation of resources in a marketPrice mechanism determines the allocation of resources in a marketGovernments affect the allocation of resources in market economies in 5 ways1Government Spending roads education transfer payments and wars for example2Taxationincome sales and property taxes for example 2
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