Analysis of a Market, Supply and Demand

1. Analysis of a Market, Supply and Demand Moraine Park Technical College

2. Introduction What is a Market? Any place, mechanism, or condition which allows buyers and sellers an opportunity to conduct voluntary transactions.

3. Market Conditions • A. The focus is on the interaction between buyers and sellers • B. Buyers and sellers communicate with each to facilitate the exchange of goods at agree upon prices • C. Individual liberty is promoted as each buyer or seller decides whether or not to engage in voluntary exchange with others.

4. Market Conditions • Economic efficiency is promoted because resources will be allocated to their highest valued uses as determined by the cooperation between buyers and sellers.

5. Invisible Hand • Markets generate a process through which the plans and activities of individuals, families, businesses, and other private organizations are brought into better coordination with each other.

6. Invisible Hand • There is a spontaneous order which develops without the planning of any central authority (government) • The order develops from the interaction of individuals in free markets • The order is a product of human action, but not of human design

7. Demand & Supply • 1. The buyers’ willingness and ability to purchase goods at various prices is called Demand • 2. The sellers willingness and ability to part with goods at various prices is called Supply

8. Major Markets • Product Market: Firms sell their output to households and other firms. • Labor Market: Workers are hired or labor services are purchased. • Capital Market: Funds are raised and transferred between lenders and borrowers.

9. Competitive Market Model • 1. Many buyers and sellers acting independently • 2. Goods sold are sufficiently alike so buyers can choose from any one seller. • 3. Buyers and sellers are informed about prices and the quality of good. • 4. No one person or group has any control over the price • 5. Although many markets are not perfectly competitive as described in 1-4 above, they function as if they were.

10. Market Communication • Price is how we communicate with each other in a market. • Price information permits coordination between the plans of consumers and the plans of producers, thus promoting both economic productivity and social harmony.

11. Market Prices • Market prices communicate crucially important information: • 1. To consumers about product availability. • 2. To producers about consumer preferences • 3. To individuals above the relative value of particular kinds of knowledge and skills

12. Market Prices • Prices ration resources and goods • 1. When something is scarce, the quantity of it is insufficient to allow everyone to have as much as they like. • 2. There must be some method of determining who gets how much of scarce things

13. Market Prices • Price acts as a message to the market participants. • The price system is the messenger. • 1. The price system delivers a message about changing market conditions. • 2. The price system delivers does not create the changing market conditions.

14. What, How, And For Whom To Produce Is The Function of Price • What • What is produced is determined by the dollar votes that we cast for things and by the dollar costs of producing those things.

15. What, How, And For Whom To Produce Is The Function of Price • How • How goods are produced is determined as business firms compare the relative prices of resources-land, labor, physical capital, human capital and entrepreneurship. • Firms want to develop lowest-cost combination of resources.

16. What, How, And For Whom To Produce Is The Function of Price • Whom • For whom to produce is determined by the price the market creates for resources that people own-things like land, capital, and our labor services.

17. Demand • Relates to the price that you are willing to pay, as well as a variety of factors, for different quantities of a good or service • Demand refers to: • 1. Various amounts of good and service. • 2. Various prices buyers will purchase. • 3. At a specific time

18. Law of Demand • When the price of a good goes up, people buy less of it, other things being equal. • When the price of a good goes down, people buy more of it, other things being equal.

19. Demand Relationship • There is a negative, or inverse relationship between the price of any good or service and the quantity demanded, holding other factors constant.

20. Money and Relative Prices • The price paid in dollars for any good or service at any point in time is called its money price, also called absolute, nominal or current price. • The price of a commodity expressed in terms of another commodity or the weighted average price of all other commodities is called relative price.

21. Quantity Demanded, Inverse to Price • Two Reasons • Substitution effect, is the tendency of people to substitute in favor of cheaper commodities and against more expensive commodities. • Real-income effect, the change in people’s purchasing power that occurs when, other things equal, the price of one good that they purchase changes.

22. Demand Schedule • A table that shows us how much the quantity demanded for a particular item will vary at different prices that might be charged.

23. Demand Schedule for Oranges

24. Quantity Demanded • Each individual price-unit combination is referred to as QUANTITY DEMANDED

25. Demand Curve • Demand curve is a graphic representation of the demand schedule. • A negatively sloped line showing the inverse relationship between price and the quantity demanded.

26. Demand Curve • Two Classifications of a Demand Curve • Individual • Market

27. Demand Curve • The Demand Curve slopes downward and to the right. • 1. As price drops, we move down the vertical axis. • 2. As price drops, we move to the right on the horizontal quantity axis

29. Demand Curve • Each individual point on the graph shows the quantity demanded at the relevant price. • All points taken together (connected by the line) show the DEMAND for oranges.

30. Change In Quantity Demanded • Only one factor will cause a change in quantity demanded and that is a change in price of the product being considered. • What happens to quantity demanded if the price of oranges drops from $2.00 to $1.60? Or if the price of oranges rises from $1.20 to $1.60?

31. Change In Quantity Demanded

32. Change in Quantity Demanded • Assume: Prices of oranges drops from $2.00 per pound to $1.60 • The quantity demanded would increase from 1,000 to 2,200 pounds of oranges. • We moved from one price-unit combination (P1,Q1) to another price-unit combination (P2,Q2). • We move down along the original demand curve when the quantity demanded increases.

33. Change in Quantity Demanded • Assume: Prices of oranges rises from $1.20 per pound to $1.60. • P2 • P1 • Q1 • Q2

34. Change in Quantity Demanded • The quantity demanded would decrease from 3,400 to 2,200 pounds of oranges. • We moved from one price-unit combination (P1, Q1) to another price-unit combination (P2, Q2). • We move up along the original demand curve when the quantity demanded decreases. • Assume: Prices of oranges rises from $1.20 per pound to $1.60.

35. Change in Demand • A change or shift in demand causes the entire curve to move • The change occurs due to changes in factors other than price • Example: Income for Orange Consumers Rises

36. Factors that Influence Change in Demand • A change in the level of consumer income. • A change in tastes or preferences of consumers. • A change in the prices of related goods. • A change in buyer’s expectations about future prices. • A change in population: size and age composition.

37. Change in Demand • To show a change in demand on a graph, you must shift the entire demand curve. • When demand increases, the demand curve shifts to the right or outward. • When demand decreases, the demand curve shifts the left or inward.

38. Change in Demand • Assume: Income of Orange Consumers Rises • d1 • d

39. Change in Demand • If, Income rises, then • Consumers will purchase more oranges • The demand for oranges will increase • A change in demand means that there is an increase or decrease in the number of units purchased throughout the range of prices at which they are offered

40. Supply • A schedule showing the relationship between price and quantity supplied, other things being equal, for a specified period of time. • Supply refers to: • 1. Various amounts of a good and service. • 2. Various prices sellers will produce. • 3. At a specific time.

41. Law of Supply • At higher prices, a larger quantity will generally be supplied than a lower prices, all other things held constant. • At lower prices, a smaller quantity will generally be supplied than at higher prices, all other things held constant.

42. Supply Relationship • There is a positive, or direct relationship between the price of any good or service and the quantity supplied, holding other factors constant.

43. Quantity Supplied, Direct to Price • Two Reasons • Incentives for Increasing Production Firms will find it more rewarding monetarily than before to spend more of their time and resources, given a price increase. • Law of Increasing Costs As society takes more and more resources and applies them to the production of any specific item, the opportunity cost for each additional unit produced increases.

44. Supply Schedule • A table that shows how much the quantity supplied for a particular item will vary at different prices that might be charged.

45. Supply Schedule for Oranges

46. Quantity Supplied • Each individual price-unit combination is referred to as QUANTITY SUPPLIED

47. Supply Curve • Supply curve is a graphic representation of the supply schedule • A positive sloped line showing the direct relationship between price and the quantity supplied.

48. Supply Curve • The Supply Curve slopes upward and to the right. • 1. As the price rises, we move up the vertical axis. • 2. As the price rises, we move to the right on the horizontal quantity axis.

49. Supply Curve For Oranges

50. Supply Curve • Each individual point on the graph shows the quantity supplied at the relevant price. • All points taken together (connected by the line) show the SUPPLY for oranges.