Markets and Demand
Lecture 5: Markets and Demand
Money.
-Barter requires no special tools.
-Buying and selling requires money.
-Selling means obtaining money in exchange for goods.
-Buying is the opposite.
-Commodity money: salt, gold.
-Fiat money: modern money. Has no value of its own (paper or computer memory), its declared to be money by the government or other institution.
Acceptance of money.
-Why do people accept paper money? We accept it because we know others will accept it.
-Bitcoin: money invented by a Japanese computer scientist.
-What happens if I told you, don’t accept dollars they are worthless, you wouldn’t listen. But if Obama says it on television you would listen.
Competition.
-It is the driving force of any free-market economic system.
-Focus on selling and buying rather than barter.
-Price: the amount of money exchanged for one unit of the good. Are useful because they tell you the value of something.
-Prices under barter? Prices are not clearly defined in a barter system. Does define the ratio for each pair of goods.
Perfect Competition.
-It is a market with many buyers and many sellers, none dominant. (Doesn’t exist)
-Some markets are fairly close, but it is just a model.
-Has one homogenous good (everything is the same)
-Many buyers and sellers
-Voluntary exchange
-Full information and perfect foresight (everybody has to know what is going on, what every buyer and seller is doing).
-Rational, self-interested agents (make themselves better off).
-Free entry to the market.
Law of one price.
-Goods can only have one price.
-At any given time in a perfectly competitive market, identical goods must have the same price.
-Under perfect competition, transactions at two or more prices will not be completed.
Arbitrage Example.
-C is ready to buy something from D for 1 dollar. R is ready to buy from S for 3 dollars. C and S are winners and D and R are losers (paying more and getting less). None of them know about
Money.
-Barter requires no special tools.
-Buying and selling requires money.
-Selling means obtaining money in exchange for goods.
-Buying is the opposite.
-Commodity money: salt, gold.
-Fiat money: modern money. Has no value of its own (paper or computer memory), its declared to be money by the government or other institution.
Acceptance of money.
-Why do people accept paper money? We accept it because we know others will accept it.
-Bitcoin: money invented by a Japanese computer scientist.
-What happens if I told you, don’t accept dollars they are worthless, you wouldn’t listen. But if Obama says it on television you would listen.
Competition.
-It is the driving force of any free-market economic system.
-Focus on selling and buying rather than barter.
-Price: the amount of money exchanged for one unit of the good. Are useful because they tell you the value of something.
-Prices under barter? Prices are not clearly defined in a barter system. Does define the ratio for each pair of goods.
Perfect Competition.
-It is a market with many buyers and many sellers, none dominant. (Doesn’t exist)
-Some markets are fairly close, but it is just a model.
-Has one homogenous good (everything is the same)
-Many buyers and sellers
-Voluntary exchange
-Full information and perfect foresight (everybody has to know what is going on, what every buyer and seller is doing).
-Rational, self-interested agents (make themselves better off).
-Free entry to the market.
Law of one price.
-Goods can only have one price.
-At any given time in a perfectly competitive market, identical goods must have the same price.
-Under perfect competition, transactions at two or more prices will not be completed.
Arbitrage Example.
-C is ready to buy something from D for 1 dollar. R is ready to buy from S for 3 dollars. C and S are winners and D and R are losers (paying more and getting less). None of them know about