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P.5. Markets, p.58.

I.     Macro Economics- looks at:

                 General forces that work

                 Totals of unemployment


II.    Micro economics- looks at:

                 Individual decision makers

                 Markets- Interconnection between buyers and sellers (medium-prices)

III.   Assumptions:

                        People are selfish (want maximum they can get)

                        People are competitive

                        People dislike work

Price system- vital economic decisions taken through medium of prices.

People want productsprice risesbusinesses will produce itwill employ labour & resources.

Prices -- important as connecting or communicating mechanism between consumers and producers in consumer goods and factor markets (fig.5.1 p.60).

IV.  Demand

Effective demand:                        price



ex ante demand: quantity consumers wish to demand at certain price

ex post demand: quantity actually succeed in buying


The satisfaction that consumers derive from purchasing goods and services.

Law of diminishing marginal utility: other things being constant, as more and more units of a commodity are consumed the additional satisfaction, or utility derived from the consumption of each successive unit will decrease.

Factors affecting MU:

1.       Time- varies from product to product

2.       Income- new pair of shoes to millionaire doesn't give much utility

3.       Addiction

Ceteris paribus, more will be demanded at lower price.

TR = PxQ, increase is shift, extension is movement along.

VI. Supply

Defn. quantity of commodity that suppliers wish to supply at a particular time.

1.       Price

2.       Price of factors of production

3.       The price of other commodities (will substitute)

4.       Technology

5.       Tastes of producers

6.       Exogenous factors (weather)

Partial equilibrium- only in one market

General equilibrium- belongs to macroeconomics (discovered by Walras)

Competition + A. Smith invisible hand lead to optimum allocation of resources.

Problems of invisible hand and equilibrium:

The uneven distribution of income.

Dangerous products

Competition- invisible hand works only free market.



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