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Market Participants

Market Participants. More than 300 million individual consumers, 30 million business firms, and many thousands of government agencies participate directly in the U.S. economy.

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Market Participants

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  1. Market Participants • More than 300 million individual consumers, 30 million business firms, and many thousands of government agencies participate directly in the U.S. economy. • Millions of foreigners also participate by buying and selling goods in American markets while Americans participate in foreign markets. LO-1 3-2

  2. Goals of Market Participants • Consumers — maximize happiness or satisfaction from goods and services. • Businesses — maximize profits. • Government — maximize general welfare of society. • Foreigners—pursue same goals as consumers, producers, and government agencies. LO-1 3-3

  3. Constraints • Limited resources: • Consumers need to make choices from available products. • Producers must choose how to best use their limited resources. LO-1 3-4

  4. Market and Interactions • A market is any place where goods are bought and sold and includes the interaction of all buyers and sellers. • Four groups of Market Participants: • Consumers • Business firms • Governments • Foreigners LO-1 3-6

  5. The Two Markets • Factor Market: • Any place where factors of production (land, labor, capital, and entrepreneurship) are bought and sold. • Product Market: • Any place where finished goods and services (products) are bought and sold. LO-1 3-7

  6. Figure 3.1

  7. Product Market • Consumers buy and producers sell in the product market. • Imports and exports are also a part of the product market. • Governments supply goods and services in product markets. LO-1 3-8

  8. Locating Markets • A market is anywhere an economic exchange occurs. • A market exists wherever and whenever an exchange takes place. LO-1 3-9

  9. Dollars and Exchange • Some market transactions involve barter. • Barter is the direct exchange of one good for another, without the use of money. • Bartering has limits as it requires a seller who wants whatever good is up for exchange. LO-1 3-10

  10. Dollars and Exchange • Nearly every market transaction involves an exchange of dollars for goods (in product markets) or resources (in factor markets). • Money plays a critical role in facilitating market exchanges and the specialization these exchanges permit. LO-1 3-11

  11. Supply and Demand • Market transactions require two sides: -Supply -Demand LO-2 3-12

  12. Supply and Demand • Supply – The ability and willingness to sell (produce) specific quantities of a good at alternative prices in a given time period, ceteris paribus (other things being equal). LO-2 3-13

  13. Supply and Demand • Demand – The ability and willingness to buy specific quantities of a good at alternative prices in a given time period, ceteris paribus (other things being equal). LO-2 3-14

  14. Supply and Demand • Every market transaction involves an exchange and thus some element of both supply and demand. LO-2 3-15

  15. Individual Demand • A demand exists only if someone is both willing and able to pay for a good. • How much someone is willing to pay for something is determined by his/her income and the opportunity cost. • Opportunity cost – the most desired goods or services foregone in order to obtain something else. LO-2 3-16

  16. Demand Schedule • A table showing the quantities of a good a consumer is willing and able to buy at alternative prices in a given time period, ceteris paribus. • Demand is an expression of buyer intentions—of a willingness to buy—not a statement of actual purchases. LO-2 3-17

  17. Demand Curve • A curve describing the quantities of a good a consumer is willing and able to buy at alternative prices in a given time period, ceteris paribus. • The demand curve does not state actual purchases, rather only what consumers are willing and able to purchase. LO-2 3-18

  18. Figure 3.2

  19. Law of Demand • The quantity of a good demanded in a given time period increases as its price falls, ceteris paribus. • There is an inverse or negative relationship between price and quantity demanded, ceteris paribus. LO-2 3-19

  20. Determinants of Demand • Tastes (desire for this and other goods) • Income (of the consumer) • Other goods (their availability and price) • Expectations (for income, prices, tastes) • Number of buyers LO-2 3-20

  21. Ceteris Paribus • The assumption that nothing else changes. • Focus on one or two forces at a time. • Allows us to focus on the relationship between quantity demanded and price. • Tells us what independent influence price has on consumption decisions. LO-2 3-21

  22. Shift in Demand • The demand schedule and curve remain unchanged only so long as the underlying determinants of demand remain constant. LO-2 3-22

  23. Shift in Demand • Changes in any of the determinants of demand will cause the demand curve to shift. • The quantity demanded at any (every) given price changes. • The demand curve always shifts only to the right or to the left. LO-2 3-23

  24. Figure 3.3

  25. Movement versus Shifts • Movements along a demand curve are a response to price changes for that good. • Shifts of the demand curve occur only when the determinants of demand change. LO-2 3-24

  26. Movement versus Shifts • Changes in quantity demanded: • Movements along a given demand curve in response to changes in price. • Changes in demand: • Shifts of the demand curve due to changes in tastes, income, other goods, or expectations. LO-2 3-25

  27. Market Demand • The total quantities of a good or service people are willing and able to buy at alternative prices in a given time period. • The sum of individual demands. • Market demand is determined by the number of potential buyers and their respective tastes, incomes, other goods, and expectations. LO-2 3-26

  28. The Market Demand Curve • A picture of the total quantities demanded by all consumers within a market at different prices. LO-2 3-27

  29. The Use of Demand Curves • Show how much consumers will spend at different prices. • Predict the amount to produce at a given price. • Determine the price that will result in desired output levels. LO-2 3-28

  30. Market Supply • Supply interacts with demand to determine the price that will be charged. • The total quantities of a good or service that sellers are willing and able to sell at alternative prices in a given time period, ceteris paribus. • The sum of individual supplies. LO-2 3-29

  31. Market Supply • Market supply is an expression of sellers’ intentions—of the ability and willingness to sell—not a statement of actual sales. LO-2 3-30

  32. Figure 3.5

  33. Determinants of Supply • Technology • Factor (or resource) costs • Other goods • Taxes and subsidies • Expectations • Number of sellers LO-2 3-31

  34. Law of Supply • The quantity of a good supplied in a given time period increases as its price increases, ceteris paribus. • There is a direct or positive relationship between price and quantity supplied, ceteris paribus. LO-2 3-32

  35. Shifts in Supply • Changes in a quantity supplied: • Movement along a given supply curve. • Changes in supply: • Shifts in the supply curve due to a change in one of the determinants of supply. LO-2 3-33

  36. Equilibrium • Only one price and quantity are compatible with the existing intentions of both buyers and sellers. • The price at which the quantity of a good demanded in a given time period equals the quantity supplied. LO-3 3-34

  37. Figure 3.6

  38. Equilibrium Price • The equilibrium price occurs at the intersection of the supply and demand curves. • There is only one equilibrium price. • The market will naturally move toward this price. LO-3 3-35

  39. Market Clearing • Collective actions of sellers and buyers create an equilibrium price. • The equilibrium price and quantity reflect a compromise between buyers and sellers. • No other compromise yields a quantity demanded that is exactly equal to the quantity supplied. LO-3 3-36

  40. Invisible Hand • The market behaves as if it is directed by some unseen force. Adam Smith (1776) called this the invisible hand. • It means that the equilibrium price is determined by the collective behavior of many buyers and sellers. LO-3 3-37

  41. Surplus and Shortage • A market surplus or a market shortage emerges whenever the market price is set above or below the equilibrium. LO-3 3-38

  42. Market Shortage • The amount by which the quantity demanded exceeds the quantity supplied at a given price. • Occurs when the selling price is lower than the equilibrium price. • Sellers supply less than buyers demand at the current price. LO-3 3-39

  43. Market Surplus • The amount by which the quantity supplied exceeds the quantity demanded at a given price. • Occurs when the selling price is higher than the equilibrium price. • Sellers supply more than buyers demand at the current price. LO-3 3-40

  44. Changes in Equilibrium • Equilibrium price and quantity change whenever the supply or demand curves shift. • This happens when the determinants of supply or demand change. LO-4 3-42

  45. Figure 3.7

  46. Disequilibrium Pricing • Price Ceiling: • Upper limit (maximum price) imposed on the price of a good or service. • Price Floor: • Lower limit (minimum price) imposed on the price of a good or service. LO-5 3-43

  47. Price Ceilings • Price ceilings have three predictable effects: • They increase quantity demanded. • They decrease quantity supplied. • They create a market shortage. • Rent controls on housing are an example. • There will be less housing for everyone when rent controls are imposed. LO-5 3-44

  48. Figure 3.8

  49. Price Floors • Price floors have three predictable effects: • They increase quantity supplied. • They decrease quantity demanded. • They create a market surplus. • Minimum wages and price supports for agriculture are examples. LO-5 3-45

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