• Previously, we learned how goods are produced in the context of an aggregate economy (a country, a firm, etc.).
• We considered a case of closed economy, where the production of goods was used to satisfy its own consumption.
• Agents use the resources they are endowed with as factors to produce the goods.
• How do we redistribute goods that we produce?

• One way of redistribution is a bilateral competitive market.
• A market is a mechanism that brings buyers and sellers together. There are markets for goods and services, but also for factors as well.
• A competitive market is a market where no agent holds substantial amount of "market power".
• Market power describes an ability of the agent to affect the parameters of the market (prices, barriers, etc.).
• A bilateral market divides the participants into two sides: the demand side and the supply side.

• Market demand is defined by the quantity demanded of any good, service, or resource that people are willing and able to buy during a specified period at a specified price.
• Demand is usually shown as a tuple price-quantity: \((P, Q_d)\).
• Having a certain demand usually implies unchanging preferences (view and necessity of the good remains the same) and income (ability to purchase a good is constant).
• We also consider demand to be a static variable, i.e. it shows the relationship between quantity demanded and the price in a particular point of time.

• To formalize all possible demanded quantities for given prices, we define a demand function \(Q_d=f(P,\epsilon)\), where \(\epsilon\) is nuisance parameters that affect the demand.
• For simplicity and interpretation, we assume \(f(.)\) to be a linear function in \(P\).
• The "law of demand" suggests that \(f(.)\) is a decreasing function in \(P\).

• We can consider demand for a certain good on different levels: an agent level (individual consumer) and an aggregate level (market demand).
• Market demand is the sum of the demands of all the buyers in a market.

• Consider we have three individuals (A, B, C) who have the following demand functions:

• Price	A	B	C
  0	1	2	4
  1	0.5	\(\frac{4}{3}\)	3
  2	0	\(\frac{2}{3}\)	2
  3	0	0	1
  4	0	0	0

• Assuming the demand functions are linear, find the total demand curve.

• When other variables in \(\epsilon\) change, the demand curve shifts.
• When the change causes decrease in demand, the curve shifts leftwards.
• When the change causes increase in demand, the curve shifts rightwards.

• In terms of preferences, goods have substitutes and complements.
• A substitute for a good is another good that can be consumed in its place.
• When substitutes become more affordable, the demand for original good decreases.
• A complement of a good is another good that is consumed with it.
• When prices for complement rise, the demand for original good decreases.

• Agents make decisions not only based on the current situation.
• The information and expectations about the future affects it as well.
• If agent expects future prices to raise, she might stockpile for the future consumption.

• If consumption of the good increases as income of the agent increases, then we call that good a normal good.
• If consumption of the good decreases as income of the agent increases, then we call that good a inferior good.

• The second side of bilateral market is market supply that is consist of people and firms that are willing and able to sell during a specified period at a specified price.
• Supply is usually shown as a tuple price-quantity: \((P, Q_s)\).
• Supply depends on the state of production technology.
• Just as demand, supply is a static variable.

• "Law of supply" implies that the supply curve \(Q_s=f(P,\chi)\) is upward sloping, where \(\chi\) is nuisance of factors, such as prices of resources, capacity of the market, productivity, etc.
• To aggregate supply from the individual firm's level to the level of the market, we need to add all the suppliers in the regions of the price that they produce.
• When supply increases, the supply curve shifts rightwards. When supply decreases, the supply curve shifts leftwards.

• To produce output, firms deploy various resources in production.
• Where availability or prices of these resources change, two cases may happen.
• Firms may raise the prices to account for its increasing cost (if they can).
• Firms may change the structure of production in response of changing environment. Violation of "law of supply" may occur.

• If there are no barriers to enter the market, firms may enter and exit supply side of the market.
• When the number of firms increasing, the aggregate supply also increases.
• If firms make decisions based on the number of competitors in the market, violation of "law of supply" may occur.

• Productivity is defined as output per unit of input.
• If factors of production become more productive (i.e. for the same input we can produce more output), supply increases.
• There are situations where structure of supply is left unchanged.

• There are 3 firms (A, B, and C) on the market with the following supply curves:
• \[ P=2Q_s+1\\ P=Q_s\\ P=0.5Q_s-3 \]
• Find aggregate supply.
• Suppose a labor union lobbied increased wage for workers in this industry. How aggregate supply curve changes?

• There are two firms on the market: A and B, with the following supply curves:

\[ A:\,\, P=2Q_s+1\\ B:\,\, P=Q_s+2 \]

• Find aggregate supply curve.
• Suppose two new firms enter the market. They are identical to A and B. What happens to individual supply curves? What happens to aggregate supply curve?

• We considered how goods are redistributed in a competitive market economy.
• We analyzed the consumer side of the economy and gave definition to "law of demand".
• We analyzed how production reaches the markets and how it is affected by various factors of production.