ROLE OF MARKETS

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ROLE OF MARKETS

• EEP 255 CLASS 7
• Sept 16, 2003
• Satish Joshi

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Competitive Market Model
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Why is it important to understand markets?

• Institutions of economic co-ordination
• They determine prices we pay for economic goods
  and services and the quantity of economic goods
  and services
• They provide information about the relative
  scarcity of economic goods and services
• Understanding helps prediction of price and
  quantity changes in response to events/policies
• Market models have been extended to marriage,
  children, crime, politics,...

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Discover Resources
Extract Raw Materials
Separate Pure Materials
Mix Compound Materials
Form Parts
Assemble Products
Use Products
Dispose Refuse
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How is the transfer of inputs and outputs
coordinated between different levels of the IM
model and IM models of different products?
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IM Model and Markets
1. Discover Resources
Output
2. Extract Raw Materials
3. Separate Pure Materials
4. Mix Compound Materials
5. Form Parts
6. Assemble Products
7. Use Products
8. Dispose Refuse
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The good Q is defined differently in each market
Iron Ore deposits
1. Discover Resources
Output
Tons of Iron Ore
2. Extract Raw Materials
Tons of Billets/blooms
3. Separate Pure Materials
Tons of low carbon steel
4. Mix Compound Materials
Steel sheet rolls or auto body parts
5. Form Parts
Automobiles
6. Assemble Products
7. Use Products
Rent/Lease cars
8. Dispose Refuse
Auto hulks
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The good Q is defined differently in each market
Crude Oil deposits
1. Discover Resources
Output
Barrels of Crude Oil
2. Extract Raw Materials
Gallons of gasoline
3. Separate Pure Materials
Gallons of Regular gasoline
4. Mix Compound Materials
Gallons of 87 Oct gasoline at wholesale
5. Form Parts
Gallons of regular gasoline at retail
6. Assemble Products
7. Use Products
Tons of CO2, or vehicle inspection?
8. Dispose Refuse
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Direct Requirements
IO Model
Outputs
Inputs
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How is the transfer of inputs and outputs
coordinated between different industry sectors in
the IO model?
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Markets!
IO Model
Outputs
Inputs
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Markets Are Also Defined Geographically
Regional Gasoline Price Differences
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Markets Are Also Defined Over Time Periods
Imported Crude Oil and Average Retail Gasoline
Prices
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What is Traded in the Market?
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Example 1 World Crude Oil Market
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Example 2 World Market for Light Crude Oil
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Example 3 World Market for U.S. Crude Oil
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Example 4 California Crude Oil Market
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Sellers and market supply
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SUPPLY

• Producers -gt Supply goods and services
• Quantity of supply (or quantity supplied) is the
  amount the producers wish to sell at a given
  price.
• Supply schedule A table showing the quantity of
  supply of a particular good at each price
  holding every thing else constant, input prices,
  production technology, number of producers etc
• Supply curve A graph of a supply schedule
• Supply Curve is also the Marginal cost curve.

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Marginal cost curve
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Market observations
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Sellers total revenue for one unit
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Total revenue for two units
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Total revenue for three units
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Total revenue for four units
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Total revenue for five units
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Total revenue for six units
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Marginal cost Curve
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PRODUCERS NET REVENUE (SURPLUS)
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Constant marginal cost versusincreasing marginal
cost
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Buyers and Market Demand
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DEMAND

• Buyers -gt demand goods and services
• Quantity of demand (or quantity demanded) is the
  amount the buyers wish to buy at a given price.
• Demand schedule A table showing the quantity
  demanded of a particular good at each price
  holding every thing else constant, population,
  prices of substitutes and compliments, consumer
  tastes
• Demand curve A graph of a demand schedule
• Demand curve also represents the Marginal Benefit
  curve!

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Demand
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Market observations
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At a price of 6 willing to buy one unit
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At price of 5 willing to buy 2 units
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At price of 4 willing to buy 3 units
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At price of 3 willing to buy 4 units
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At price of 2 willing to buy 5 units
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At price of 1 willing to buy 6 units
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Marginal benefits revealed!
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Marginal Benefit of the first Unit
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Marginal benefits
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Marginal benefit or marginal willingness to pay
curve
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Demand
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Consumer surplus when price is 2
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Market Supply and Demand
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ROLE OF MARKETS(continued)

• EEP 255 CLASS 8
• Sept 18, 2003
• Satish Joshi

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ANNOUNCEMENT

• I will be at a conference in Seattle next week.
• Tuesdays class is an in-class exercise. Lulama
  (TA) will manage the class.
• Thursdays class will be taught by Dr. Pat
  Norris, (who teaches the EEP-255 course during
  Spring Semesters). The class will be mainly a
  review for Exam 1
• Exam 1 is on Sept 30th.
• Exam study questions will be posted this weekend
• I will be available for office hours on Fri Sept
  26th.

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Equilibrium Price and Quantity
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Equilibrium Price and Quantity
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Movement along a S or D curve v/s shift in S or D
curve

• Movement along a supply/Demand curve occurs when
  quantity changes in response to changes in own
  price (ie. Price of the good whose market is
  modeled). The changes are in quantity supplied or
  demanded
• Shift in the Supply (curve) or Demand (curve)
  occurs when other factors (other than own price)
  change. S or D Function changes

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Shift in Market Supply
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Shift in Market Demand
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Factors that Shift Market Supply

• Input price changes
• Technology
• Environmental factors
• Expectations
• Taxes and subsidies
• Transaction costs (institutional capital)
• Number of suppliers

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Change in Market Demand

• Price of substitutes
• Price of complements
• Income
• Production Technology (Derived Demand)
• Preferences
• Expectations
• Taxes and subsidies
• of consumers

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Government Mandated Price
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Government Mandated Quantity
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Adding Individual Supply Curves
Price
S1
S2
Quantity
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Q Values of Individual Supply Curves
Price
S1
S2
Quantity
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Add Q Values Horizontally
Price
S1
S2
S3
Quantity
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Market Supply Horizontal Sum of Individual
Supply Curves
Price
S1
S2
S3
Quantity
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Adding Individual Demand Curves Applies to
Private Goods Only
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Q Values of Individual Demand Curves
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Add Q Values Horizontally
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Market Demand Horizontal Sum of Individual
Demand Curves
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Market Efficiency
Marginal Benefits
Marginal Costs
gains
losses

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-

-
-


-

-
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Assumptions underlying the ideal market model

• Property Rights
• Use rights
• Exclusion rights
• Transfer rights
• Enforcement rights
• Characteristics of goods
• Private goods (rival and excludable)
• Market competition
• Large number of sellers and buyers
• No Externalities
• Private costs/benefits social (true) resource
  costs/benefits

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Market Facilitators

• Money as a common metric v/s barter
• Standards and grades
• Information and communication