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Lecture 2 and 3: Demand, Supply &
Markets
Lecture Objectives:
1. To define markets
2. To define & identify the key
determinants of market demand &
market supply
3. To define & explain the ‘mechanics’ of
markets
What is a Market?
 Economic function
- The meeting of people for the purchase/ sale of
goods at a fixed time and place

An open space where goods are exposed for sale
Social function
“there is probably no urban market-place where the
interchange of news and opinion did not play almost as
important a role as the interchange of goods” (Mumford,
L., 1961, The City in History)
Further Characteristics of Markets

Face to face or anonymous?
Face to face interaction needed if…
- products are differentiated
- asymmetric information
- difficult to obtain
- parties require high degree of trust
 Numbers of buyers & sellers
-
helps define structure of market, e.g.
perfect competition or monopoly
-
provides insight into conduct of firms
-
can be misleading, e.g. “supermarket”
may only have 1 provider
DEMAND
• Demand functions……
- formalizing aggregate consumer behavior
We can simplify the demand relationship as follows:
Qdxt = f (Px, P0, Y, T, Ax……..)
Where….
Qdxt is quantity demanded of good x at time ‘t’
Px is the price of good x
P0 is the price of related goods
Y is real household income
T is household taste, and
A is advertising expenditure on product X
and so on….
DEMAND
• Other determinants of demand
– tastes
– distribution of income
– expectations
To simplify a complex world we begin assuming
Qdxt = f (Px)
A Demand Curve
Px
Qdxt = 12 - 2Px
6
0
12
Qdx
Supply
Supply Functions
- formalizing aggregate supplier behavior
Qsxt = f ( Px, Po, C, Tn, Tx, Tp……)
Where
Qsxt is the quantity supplied at time ‘t’
Px is the price of good x
Po is the price of other good
C is the cost of production
Tn is the Technology
Tx is the tax rate
Tp is the taste of producers
and so on…
Supply
• Other determinants of supply
– nature and other random fluctuations
– aims of producers
– expectations of producers
A Supply Curve
P
S0
Qsx = - 10 + 20Px
O
Q
Shift in Supply Curve
Price of one Bottle of
Vodka
Producers’ Willingness to
Sell (Quantity Supplied)
‘000 bottles
Customers’ Willingness to
Buy (Quantity Demanded)
‘000 bottles
Rs. 20
700
100
Rs. 16
500
200
Rs. 12
350
350
Rs. 8
200
500
Rs. 4
100
700
Price
(Rbs)
E
Market equilibrium
(Vodka: monthly)
e
Supply
d
D
E
b
SHORTAGE
B
(300 000)
A
Demand
Quantity (bottles: 000s)
Student Tasks:
a) Show what happens if income rises in
the above market
b) Show what happens if the Mauritian
Government adds a tax on suppliers
c) How does your answer to a) change if
Stalinski Vodka is highly addictive?
Production Frontier
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