Digitally summarized economics notes for economics 114.
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UNIT 8: DEMAND AND SUPPLY
Looking at markets where
many buyers and sellers interact and how the competitive market price is
determined by both preferences of consumers and costs of suppliers .
Decisions of
price taking
-
firms are affected by behaviour of competing firms and consumers .
Demand and supply
e. g. Consider a market for a second -
hand ecos textbook
Demand comes from students about to take the course and differ in their WTP
differ in
supply comes from students who
previously completed the course and WTA
reservation price : lowest price at which someone is willing to sell a
good = WTA
table /
* Demand curve represents WTP of
buyers ( can also be
presented as a
equation )
Demand -
WTP
supply WTA
-
*
supply curve is drawn by lining sellers from those with lowest reservation price
•
First seller has reservation
price ( WTA ) of $2
•
20th seller : WTA of $7
•
40th seller : WTA Of $12
, The market and
equilibrium price
•
markets and their institutions
bring buyers and sellers together .
Alfred Marschall introduced model he called the price that would
a
equate quantity
•
:
supplied and
quantity demand the
equilibrium price
Price above
equilibrium price excess supply (
eventually price will adjust downwards)
•
:
Price below demand
equilibrium price excess
•
:
NB : Marschall 's model can
only be applied to markets selling identical goods :
price taking
-
firms
Demand and demanded
quantity
is determined
Demand curve
by prices buyer 's are WTP
•
•
Quantity demanded is a function of price : Qd = f- ( P ) ; e.
g. Qd = 40 -
ZP
•
P =
FCQD )
gives us the inverse demand function which
gives us the demand curve
,
Demand is in of
i. curve 's
equation given terms P
and
supply quantity supplied
is determined
supply curve
by prices sellers are WTA
•
•
Quantity supplied is a function of price : Qs = f- ( P )
•
P =
FCQS )
gives us the inverse supply function which
gives us the supply curve
,
is in of
i.
supply curve 's
equation given terms P
Price -
taking firms
•
A price
-
TAKING firm uses the
prevailing market price to
optimize quantity supplied
•
The competitive market model assumes that a firm is in a competitive market : it can
sell it the market price this will not influence market price
any quantity wants to at
If P > WTP
,
the buyer would look for someone with a lower WTA
If WTP P the seller would look for with higher WTP
-
,
someone a
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