Markets

Market

• Collection of buyers and sellers of a particular product.• Physical location or not• Facilitates exchange

Competitive markets

• Characteristics• Many buyers/many sellers• No entity has market power• No entity can influence price

• Price takers

• Homogeneous production• Identical products

Competitive markets

• Free entry/exit• No barriers to entry

• Full information• Voluntary exchange• Private costs and benefits• No 3rd parties to the exchange

Demand

• Demand function• Demand schedule• Demand curve

• Quantity of a good that buyers are willing and able to purchase at various prices, ceteris paribus, or all else remains the same• All other factors are held constant

Demand

• Hypothetical situation• At various possible prices, how much would you

buy• Don’t worry if the firm will make it.

Law of demand

• Quantity demanded of a product is inversely related to price

• Price and quantity demanded are negatively related

• Price rises: quantity demanded falls• Price falls: quantity demanded rises

• Demand curves slope down

Why?

• Intuition• Law of decreasing returns• Decreasing marginal utility

• Dual effects• Substitution effect• Income effect

Change in quantity demanded

• Movement along demand curve• Due to change in price (axis variable)• When price changes, consumer buys a new

quantity of the good• They change their quantity demanded

Change in demand

• Shift in demand curve• Due to change in other factors• When background factor changes, there is a

new demand relationship• There is an overall change in demand• There is an across the board shift

Change in quantity demanded vs. change in demand

Change in quantity demanded

• Movement along the curve• Caused by change in price

Change in demand

• Shift in demand curve• Caused by change in other

factors

Shifts in demand

• Increase in demand• Shift RIGHT• Greater quantity demanded at EACH price

• Decrease in demand• Shift LEFT• Less quantity demanded at EACH price

Other factors affecting demand:Demand “shifters”

• Income• Response to income change depends on type of

good• Normal:

• Increase in income: increase in demand• Decrease in income: decrease in demand

• Inferior:• Increase in income: decrease in demand• Decrease in income: increase in demand


• Other goods• Substitutes• Coffee/tea• Ice cream/pie

• Increase in price: increase in demand• Decrease in price: decrease in demand


• Other goods (continued)• Complements• Gasoline/SUVs• Coffee/donuts

• Increase in price: decrease in demand• Decrease in price: increase in demand


• Tastes• Desire for good

• Predictable effects


• Number of buyers• More buyers: increase in demand• Fewer buyers: decrease in demand

• More or less demanded at each and every price due to number of individual demand curves added together

Supply

Supply

• Supply function• Supply schedule• Supply curve

• Quantity of a good that seller are willing and able to produce at various prices, ceteris paribus, or all else remains the same• All other factors are held constant

Supply

• Hypothetical situation• At various possible prices, how much would firms

produce• Don’t worry if the anyone will buy it.

Law of supply

• Quantity supplied of a product is positively related to price

• Price and quantity supplied are positively related

• Price rises: quantity supplied rises• Price falls: quantity supplied falls

• Supply curves slope up

Why?

• Intuition• Profitability

• Golden rule for firms• MB vs. MC

• Law of increasing OC• The extra cost of each additional unit increases• Marginal cost rises

Change in quantity supplied

• Movement along supply curve• Due to change in price (axis variable)• When price changes, firms change the quantity

that they produce• They change their quantity supplied

Change in supply

• Shift in supply curve• Due to change in other factors• When background factor changes, there is a

new supply relationship• There is an overall change in supply• There is an across the board shift

Change in quantity supplied vs. change in supply

Change in quantity supplied

• Movement along the curve• Caused by change in price

Change in supply

• Shift in supply curve• Caused by change in other

factors

Shifts in supply

• Increase in supply• Shift RIGHT• Greater quantity supplied at EACH price

• Decrease in supply• Shift LEFT• Less quantity supplied at EACH price

Other factors affecting supply:Supply “shifters”

• Input prices• Example • Wages• Raw materials• Energy

• Payments for resources• Across the board changes in cost of production

• Production is more costly/cheaper at every level of production


• Technology• Industrial revolution• Advances in technology make production cheaper

at every level of production• Advanced technology• Cheaper production• Increase in supply

• Firms willing to produce more at every price level• Regressive technology???


• Taxes• Treat tax a additional cost to be paid to

government• Increased taxes• Increase costs at every level• Decrease the supply curve


• Number of firms/sellers• Market supply• Sum of individual supply curves of firms• At a point in time there are a fixed number of sellers

which can change over time• More sellers (entry)

• Increase in supply• More available at every price

• Fewer sellers (exit)• Decrease in supply• Less available at every price

• Number of firms/sellers (continued)• Motivation??• Profits

• Profits are payments to resources above OC

• Positive profit attracts other resources/firms• Increase in supply over time

• Negative profit/losses disincentive to resources• Decrease in supply over time

• Number of firms/sellers (continued)• How long does it take?• Varies by industry

• Short run:• Length of time where the number of firms is fixed

• Takes time to set up a firm/wind down a firm

• Long run:• Length of time sufficiently long for firms to enter or

exit the industry

Equilibrium

• Balance point• No tendency for change• • Every player has no incentive to change

d sq q

Disequilibrium

• Price above equilibrium• Surplus/glut• Quantity supplied greater quantity demanded• Players not happy• Players will change behavior• Price will push downward• Surplus is eliminated

Disequilibrium

• Price below equilibrium• Shortage• Quantity demanded greater quantity supplied• Players not happy/change behavior• Prices pushed up• Shortage eliminated

Equilibrium

• Price mechanism• Price adjusts to bring about

• Price• Provides information• Provides incentives

s dq q

Markets

Education

Transcript of Markets