Lecture 2

Markets and the Economy

Supply and Demand
Lecturer: Dinh Mai Huong
dinhmaihuong@yahoo.com

Content
The economic system

I.
1
2

Economic Mechanism
Market Mechanism

Market forces

II.
1.
2.
3.

Supply
Demand
Equilibrium

I.1. Economic Mechanisms

Central Planning
Free market
Mixed Economy

Cuba
China
Hungary

United States
England
Sweden

Economic Mechanisms

Central planning economy

What to consume
What to produce
are all planned from the central government

Soviet economic model

Vietnam
Cuba
Eastern European countries

Economic Mechanisms

Central planning economy

What to consume
What to produce
are all planned from the central government

Soviet economic model

Vietnam
Cuba
Eastern European countries

Economic Mechanisms

Free market economy

What to consume
What to produce
are defined by the interaction of supply and
demand laws

Capitalist economies

United states
England
Canada

Economic Mechanisms

Mixed economy

The government has some interventions to market

interaction
Provide public goods and services
Using macroeconomic policies to stabilize the
fluctuations during economic cycles

Example

Singapore
Latin American
Countries in transition

I. 2. Markets:

A group of buyers and sellers of a particular good or service

MARKET FOR
FINAL GOODS
AND SERVICES

MARKET FOR
LABOR

MARKET FOR
LOANABLE
FUNDS

MARKET FOR
PRODUCTION
INPUTS
INTERACTIONS/
NEGOTIATIONS

MARKET FOR
FOREIGN
EXCHANGE
Lecture 1: Introduction to Economics

MARKET FOR

OTHERS

Slide 30/30

MARKETS AND COMPETITION

A market is a group of buyers and sellers of a

particular good or service.

The terms supply and demand refer to the

behavior of people . . . as they interact with
one another in markets.

Content
I.

II.

Market forces - Supply and Demand

1.

Supply

2.

Demand

3.

Equilibrium of Market

References: N.G.Mankiw, Principles of Economics, chapter 4

NEU, Economics, chapter 2

II. 1. What is supply?

Do you want to make/sell more clothes if the

price of clothes increase?

Supply:

Quantity supplied by producers/sellers

Law of supply

Supply schedule

What is supply?

Supply curve

Movement along supply curve

Shift of supply curve

II. 2. What is demand?

Do you buy more clothes if the price of clothes

increase?

Demand

Quantity demanded by consumers/buyers

Law of demand

Demand schedule

What is demand?

Demand curve

Movement along demand curve

Shift of demand curve

II. 3. Market equilibium

Supply and demand together

At a certain price

Quantity demanded = quantity supplied

Cross point of Demand curve and Supply

curve

SUPPLY AND DEMAND TOGETHER

Demand
Schedule

Supply
Schedule

At $2.00, the quantity

demanded is equal to the
quantity supplied!

Supply and Demand together

Input prices
Technology
Expectations
No. of sellers

Income
Related good
Taste
No. of buyer
expectations

Market not in equilibrium

What happens if economic agents decide to

change their demand/supply?

C
A

What happens if economic agents decide to

change their demand/supply?

C
B

What happens if economic agents decide to

change their demand/supply?

If demand curve shifts more?

If supply curve shifts more?
Demand curve and Supply curve shifts by the same amount?

Conclusions

Demand and supply curves are the most

simple way to express behaviors of economic
agents in the markets
Prices are the signals to relocate economys
limited resources
Free market/invisible hand is the best way to
organize the economy in term of best use of
limited resources
Government intervention helps solving market
failures

Practice 1 (page 86)

Supply and Demand together

Input prices
Technology
Expectations
No. of sellers

Income
Related good
Taste
No. of buyer
expectations

Practice 2 (page 86)

Supply and Demand

Price

Supply

P1
P0

Demand
Q0

Q1

Quantity

Supply and Demand

Price

Supply

P2
P0

Demand
Q2 Q0

Quantity

For further studies

Different types of market

Competition (chapter 14)

Monopolistic competition (chapter 16)
Monopoly (chapter 15)
Oligopoly (chapter 17)

Elasticity of Supply and Demand (chapter 5)

Government intervention:

Imposing Tax/ Transferring Income (chapter 12)

Spending on public goods and services (chapter 11)