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Lecture 2

MGEA02H3 Lecture Notes - Lecture 2: Price Ceiling, Demand Curve, Market Power

Economics for Management Studies
Course Code
Gordon Cleveland

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Week 2: Demand and Supply in a
Competitive Market
Agenda for this week:
- Overview of the competitive market model
- What is a market?
- What is competition?
- Demand
- Supply
- Equilibrium
- Shifts in Demand and Supply: how they affect equilibrium
- Price ceilings and price floors
Demand curve – behaviour of buyers
Demand has negative slope. Why?
Diminishing Marginal Utility
Supply curve – behaviour of sellers.
Supply in SR (Short-Run) = now, with existing firms only, using their existing productive capacity
(but varying amounts of labour) In short run, supply has positive slope. Why?
More expensive, increasing costs.
In long run, supply is less steeply sloped (more elastic). May be horizontal (zero slope)
Equilibrium occurs when the behaviour of buyers and sellers is consistent (the amount buyers
want to buy matches the amount sellers want to sell)
Quantity Demanded = Quantity Supplied
N.B.: Price brings these behaviours into equilibrium.
Price plays a key role in markets
What is a market?
A set of institutional arrangements that bring buyers and sellers together to negotiate the terms
for exchanging goods or services
What is competition? (perfectly competitive market)
1. Many buyers, many sellers (price takers)
2. Product is homogeneous or standardized (little brand loyalty)
3. Perfect information (no one is fooled)
4. Freedom of entry and exit in LR (no barriers to entry or exit)
Therefore, (a) producers have no market power, and (b) price competition is main form that
competition takes
Demand Curve – negatively sloped
Looks like:
Q = 60 – P so dQ/dP = -1
P = 60 - Q so dP/dQ = -1
Doesn’t have to be linear; could be
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