1. Supply, demand, and the market
Lecture 3

2. Markets
A market – any set of arrangements by which buyers and sellers of a good are in contact to trade that good
Markets may be specific places like auction, Warsaw Stock Exchange, local supermarket,
Market prices are set in many different ways: sellers and buyers bargain with each other, or compete against each other

3. The demand curve
The quantity demanded : the amount that buyers are willing to buy in some period
Quantity demanded depends on the price of the good and the other factors
Experience suggest that typically the quantity of a good demanded increases when its price goes down and decreases when its price goes up, all other things equal
the demand curve shows graphically the quantity of a good demanded at each price, with other factors held constant (ceteris paribus)

4. Consumer surplus
The highest amount of money the consumer is willing to pay for the unit of a good
Consumer surplus – the difference between willingness to pay and the price of the good

5. The supply curve
The quantity supplied : the amount sellers are willing to sell in some period.
The quantity supplied depends on the price of the good and the other factors
Quantity supplied usually increases with the price of the good, all other things equal
The supply curve shows graphically the quantity of a good supplied at each price with other factors held constant (ceteris paribus)

6. Producer surplus
Marginal cost: minimal amount of money which covers cost of one additional unit of a good supplied on the market
Producer surplus: the difference between the price and the marginal cost

7. The interaction of supply and demand: market equilibrium
The actual price in any market and the quantity bought and sold determined by interaction of supply and demand
The equilibrium price – price at which the quantity demanded equals the quantity supplied
Price not equal to the equilibrium price: the actions of buyers and sellers move it forward to the equilibrium price
The supply and demand model used in practice to predict market behavior by predicting equilibrium prices and quantities

8. Equilibrium Price
Price
Demand Q1
Supply Q2 10 1 9 2 8 3 7 4 6 5

9. Behind the demand curve What are „other factors”?
1) Prices of related goods: their impact depends on whether the goods are substitutes or complements. Substitutes: an increase in the price of one good raises the quantity demanded of the other at every price (fish and chicken). Complements: an increase in the price of one good lowers the quantity demanded of the other (gasoline and cars).
2) Consumer tastes (preferences): shaped by society, habit, education and advertising
3) Consumer incomes:
3a) when a consumer’s income rises, demand typically ( for normal goods ) goes up.
3b) BUT the demand for a special type of goods (inferior goods) falls when the income goes up ( low quality food for example)

10. Movements along the demand curve versus shifts of the demand curve
A demand shock :the demand curve shifts when any of the „other factors” (other than a price of the good) change
A movement along the demand curve: the response of quantity demanded to a change of its price
A shift of the demand curve causes equilibrium price and quantity to change

11. Behind the supply curve or what are „the other factors”
1)prices of other goods
2)available technology: any improvement in technology that makes possible to produce more cheaply will tend to increase supply
3)Prices of relevant inputs (labor, raw materials, durable assets) affect production costs and the quantity supplied at each price
4)Regulatory activity of the government

12. Shifts of the supply curve
A supply shock: a change of any factors held constant may cause quantity supplied to change at every price
Such a change is represented graphically as a shift of the supply curve
Anything that shifts the supply curve to the left produces a rise in price and a fall in quantity, anything that shifts the supply curve to the right produces a fall in price and a rise in quantity

13. What, how and for whom again!
There are no perfect free-market economies
Why? Because free market’s answers to the basic economic questions are sometimes unappealing
Examples: the free market does not automatically provide enough food for everyone not to be hungry, adequate shelter, clothing medical care, education. It provides all these goods for those willing and able to pay
Society may want to modify or reject free market solutions – one of the reasons why governments regulate market

14. The role of government in a modern mixed economies
Resources allocation not only through markets but also through political process
There are some reasons why government intervention can help improve the allocation of resources (provision of public goods where markets work badly)
Government intervention involves judgment about ethics or fairness
Both, markets and governments may work badly!
Quality of market regulations matters. OECD and EU regulatory reform.