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Prices and Markets

Prices and Markets . AG BM 102. Introduction. Prices change all the time The reason is because of changes in supply and/or demand This happens in a market A market is many things, but essentially it is where suppliers and demanders meet.

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Prices and Markets

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  1. Prices and Markets AG BM 102

  2. Introduction • Prices change all the time • The reason is because of changes in supply and/or demand • This happens in a market • A market is many things, but essentially it is where suppliers and demanders meet

  3. Market – the context of transactions between buyers and sellers of the same good or service

  4. A Market • Where the prices are determined • Where the terms of trade are negotiated • May be defined as a place, a time, a group of buyers or sellers, the level of the marketing system

  5. Equilibrium • Occurs where supply and demand curves meet • Defines a price and a quantity that clears market • Sends message to those in the market about preferences

  6. An Example – Beef Demand

  7. An Example – Beef Supply

  8. Demand Supply Demand = Supply

  9. If P is too low, quantity demanded exceeds quantity supplied and price is bid up If P is too high, quantity supplied exceeds quantity demanded and price falls Why is it stable?

  10. Why does this happen? • Why does a small shift in supply cause the price to change by so much? • Demand is so inelastic! • The only way to absorb the additional milk is to torpedo the price

  11. What happens when a line moves? • In this graph, the milk supply decreased • Supply curve shifts • New equilibrium at a higher price • Sometimes the demand curve shifts • Same idea – move a line, new equilibrium • Increase in demand – higher price • Decrease – lower price

  12. What changed? • If demand increases – the line moves • It crosses supply at a new point • An increase in demand causes an increase in QUANTITY SUPPLIED • In general, one line moves & you move along the other line to the new equilibrium

  13. Efficient Markets • Present price incorporates all known information • Who will sell you 100 shares Coca Cola when you want to buy? • Winner’s Curse

  14. Winner’s Curse

  15. Concluding Comments • Market defines price and quantity • Sends message to everyone about conditions • Regulates decisions • Becomes interesting when a line moves

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