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Markets and Demand

Markets and Demand. Overheads. Markets. A market is a situation in which buyers and sellers can negotiate the exchange of some product or products. A market is a group of buyers and seller with the potential to trade. The economy is just a collection of individual markets.

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Markets and Demand

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  1. Markets and Demand Overheads

  2. Markets A market is a situation in which buyers and sellers can negotiate the exchange of some product or products. A market is a group of buyers and seller with the potential to trade.

  3. The economy is just a collection of individual markets. Separate, analyze, put back together

  4. Examples of Markets Farmer’s Market Cattle auction Tractor market Used car market

  5. Markets can be of many sizes Some markets are local Some markets are regional Some markets are national Some markets are global

  6. The purpose of the analysis determines the breadth of market we specify.

  7. We often describe markets by the degree of competition by which they are characterized. Some markets are competitive ... some are not.

  8. Imperfectly competitive markets When a buyer or seller has the power to influence the price of a product, we say that the market is imperfectly competitive

  9. Examples Breakfast cereal Heavy duty trucks Slaughter of cattle Fructose syrup

  10. Purely competitive markets When buyer or sellers in a market are not able affect the price of a product, we say that the market is purely competitive, or just, competitive.

  11. When there are many buyer or sellers in a market they are usually not able affect the price of their product. When there are few buyer or sellers in a market they are often able affect the price of their product.

  12. Examples Wheat at the production level Unskilled labor Futures contracts on sugar Coffee, Sugar and Cocoa Exchange

  13. Competitive agents A buyer or seller (agent) is said to be competitive if the agent assumes or believes that the market price is given and that the agent's actions do not influence the market price. We call such an agent a price taker.

  14. Demand for a competitive agent The total amount of a good that a competitive agent would choose to purchase at a given price is called the quantity demand by that agent. The market demand of a good is the total amount that all buyers in a market would choose to purchase at a given price.

  15. Supply for a competitive agent The total amount of a good that a competitive agent would choose to produce and sell at a given price is called the quantity supplied by that agent. The market supply of a good is the total amount that all sellers in a market would choose to produce and sell at a given price.

  16. Supply and demand are specifically relevant for competitive markets

  17. The Demand Function The demand function for a good is a rule that specifies the quantity of the good that will be demanded at a given price holding all other factors that affect the quantity demanded of the good constant.

  18. The Demand Function D = quantity demanded P = price of the good ZD = other factors that affect demand ZD = (z1, z2, z3, . . . , zr )

  19. The Law of Demand The law of demand states that when the price of a good rises, and everything else remains the same, the quantity of the good demanded will fall.

  20. The Demand Schedule The demand schedule is a list showing the quantities of a good that consumers will choose to purchase at different prices, with all other variables held constant.

  21. Demand for Hamburger Price (per lb) Quantity demanded .25 10000 0.5 9000 0.75 8000 1 7000 1.25 6000 1.5 5000 1.75 4000 2 3000 2.25 2000 2.5 1000

  22. The Demand Curve The demand curve is a graphical depiction of a demand schedule; a line showing the quantity of a good or service demanded at various prices, with all other variables held constant.

  23. The Law of Demand The law of demand says that the demand curve has a negative slope (slopes downward)

  24. D0 Demand for Hamburger Patties 3 Price 2.5 2 1.5 1 0.5 0 0 2000 4000 6000 8000 10000 12000 Quantity

  25. Other factors in the demand function Household income and wealth Prices of other goods Population or market size Expectations Tastes

  26. Demand depends on many things D = h (P, income, other prices, population, expectations, tastes )

  27. Changes in Demand A change in demand is a change in the entire relationship between price and quantity demanded. An increase in demand means that buyers would choose to buy more at any price. A decrease in demand means that they would choose to buy less at any price.

  28. Salmonella Report Example change in demand Price (per lb) Quantity Demanded New Quantity Demanded .25 10000 0.5 9000 .75 8000 1 7000 1.25 6000 1.5 5000 1.75 4000 2 3000 2.25 2000 2.5 1000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0

  29. D0 D1 Changes in demand are represented by a shift in the demand curve. Demand for Hamburger Patties Salmonella Threat 3 Price 2.5 2 1.5 1 0.5 0 0 2000 4000 6000 8000 10000 12000 Quantity

  30. Changes in demand are represented by a shift in the demand curve. When demand increases, the demand curve shifts to the right; when demand decreases, the demand curve shifts to the left.

  31. Changes in demand as compared to changes in the quantity demanded Along a fixed demand curve, as price changes the quantity demanded will change. This is called a change in the quantity demanded • in contrast to a change in demand • that shifts the whole curve

  32. Change in quantity demanded Movement along a fixed schedule or curve Change in demand Change in the whole schedule or curve

  33. D0 Change in quantity demanded D1 Change in demand Demand for Hamburger Patties Salmonella Threat 3 Price 2.5 2 1.5 1 0.5 0 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 Quantity

  34. Change in quantity demanded Demand for Hamburger Patties Change in Price 3 Price 2.5 2 D0 1.5 1 0.5 0 0 2000 4000 6000 8000 10000 12000 Quantity

  35. D1 Change in demand Demand for Hamburger Patties Salmonella Threat 3 Price 2.5 2 D0 1.5 1 0.5 0 0 2000 4000 6000 8000 10000 12000 Quantity

  36. Factors causing changes in demand Household income and wealth Prices of other goods Population or market size Expectations Tastes

  37. Income and Wealth Income is a flow variable and represents the amount that a person or firm earns over a particular period. Wealth is a stock variable and represents the total value of everything a person or firm owns, at a point in time, minus the total value of everything owed.

  38. Effect of income and wealth on demand Normal goods The demand for most goods (normal goods) is positively related to income or wealth. A rise in either income or wealth will increase the demand and shift the demand curve to the right.

  39. Effect of income and wealth on demand Inferior goods The demand for inferior goods is negatively related to income or wealth. A rise in either income or wealth will decrease the demand and shift the demand curve to the left.

  40. Effect of prices of related goods on demand Substitute goods A substitute is a good that can be used in place of some other good and that fulfills more or less the same purpose. A rise in the price of a substitute good will cause an increase in the demand for the good, shifting the demand curve to the right.

  41. Examples Big Macs and Whoppers Revlon and Maybelline eyeshadow Dodge Caravan and Ford Winstar

  42. Effect of prices of related goods on demand Complementary goods A complement is a good that is used together with some other good. A rise in the price of a complementary good will cause a decrease in the demand for the good, shifting the demand curve to the left.

  43. Examples Hamburgers and French Fry Running shoes and running socks Skis and ski poles

  44. Population and Demand A larger population means a larger demand.

  45. Expectations and Demand If individuals anticipate the price of a product will rise in the near future, they may choose to buy more of the product now, thus increasing the demand.

  46. Expectations and Demand If individuals anticipate the price of a product will fall in the near future, they may choose to buy less of the product now and wait until later to buy, thus decreasing the current demand.

  47. The Effect of Tastes on Demand If individuals develop a stronger taste for product the demand will increase and the demand curve will shift to the right. If individual’s taste for product declines, the demand will decrease and the demand curve will shift to the left.

  48. Examples Healthy food leads to a longer life Herbal tea makes you think more clearly Smoking causes you to die young You lose your teeth in an accident Your new spouse hates vegetables

  49. The End

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