Tuesday, February 5, 2008

Retail Markets

The goal of this exercise and a few subsequent exercises is to explore supply and demand in particular contexts. You should get comfortable with the model in some familiar settings and from there learn about some settings that are perhaps less familiar but are important to understand. We will consider some basic questions to explore. The answers will vary from context to context.

Here are the questions. Are markets always in competitive equilibrium? Or is it possible for trade to occur in disequilibrium? If disequilibrium trade is possible, how long does it take for price to adjust to the competitive equilibrium? Do we ultimately get to the competitive equilibrium price or are we routinely in a process of price adjustment? Do all agents face the same price or do some face different prices?

Two fundamental assumptions underlie the model of competitive equilibrium. First, it is assumed that buyers and sellers have complete and perfect information. They know all the prices that prevail as well as the qualities of all the goods and services that are traded. This is a strong assumption. We'll examine its implications by considering when it doesn't hold exactly. Second, it is assumed that trade itself is costless, in other words, that resources are not used up in transactions. This too is a strong assumption.

Let's begin by considering your own experiences as a buyer or, if you prefer, your parents' experiences as buyers. To make the writing more familiar, we'll say "you" and "your" to refer to both cases and you can respond appropriately as you see fit.

Consider different things you purchase: groceries, gasoline, electronics, clothing, etc. Feel free to expand this list to account for your own buying behavior. Do you have a favorite store to buy a certain type of item, or do you buy simply by looking for the best price?

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