Analysis of a Market, Supply and Demand

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

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

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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.

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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.

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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.

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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

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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

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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.

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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.

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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.

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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

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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

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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.

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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.

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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.

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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.

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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

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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.

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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.

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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.

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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 peoples
  purchasing power that occurs when, other things
  equal, the price of one good that they purchase
  changes.

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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.

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Demand Schedule for Oranges
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Quantity Demanded

• Each individual price-unit combination is
  referred to as QUANTITY DEMANDED

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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.

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Demand Curve

• Two Classifications of a Demand Curve
• Individual
• Market

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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

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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.

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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?

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Change In Quantity Demanded
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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.

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Change in Quantity Demanded

• Assume Prices of oranges rises from 1.20 per
  pound to 1.60.

• P2

• P1

• Q1

• Q2

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Change in Quantity Demanded

• Assume Prices of oranges rises from 1.20 per
  pound to 1.60.

• 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.

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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

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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 buyers expectations about future
  prices.
• A change in population size and age composition.

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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.

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Change in Demand

• Assume Income of Orange Consumers Rises

• d1

• d

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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

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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.

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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.

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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.

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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.

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Supply Schedule

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

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Supply Schedule for Oranges
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Quantity Supplied

• Each individual price-unit combination is
  referred to as QUANTITY SUPPLIED

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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.

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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.

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Supply Curve For Oranges
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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.

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Change In Quantity Supplied

• Only one factor will cause a change in quantity
  supplied and that is a change in price of the
  product being considered.
• What happens to quantity supplied if the price of
  oranges rises from 1.80 to 2.20? Or, if the
  price of oranges drops from 1.60 to 1.20?

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Change in Quantity Supplied

• Assume Prices of oranges rises from 1.80 per
  pound to 2.20.

• P2

• P1

• Q1

• Q2

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Change In Quantity Supplied

• Assume Prices of oranges drops from 1.60 per
  pound to 1.20

• P1

• P2

• Q1

• Q2

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Change In Quantity Supplied

• Assume Prices of oranges rises from 1.80 per
  pound to 2.20.

• The quantity supplied would increase from 2,600
  to 3,400 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 supply curve when
  the quantity supplied increases.

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Change In Quantity Supplied

• Assume Prices of oranges drops from 1.60 per
  pound to 1.20

• The quantity supplied would decrease from 2,200
  to 1,400 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 supply curve when
  the quantity supplied decreases.

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Change in Supply

• A change or shift in supply causes the entire
  curve to move.
• The change occurs due to changes in factors other
  than price.
• Example New machinery to harvest oranges.

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Factors that Influence Change in Supply

• 1. A change in the cost of production
• 2. A change in the number of suppliers
• 3. A change in the suppliers expectations about
  future prices
• 4. A change in technology and productivity
• 5. A change in taxes and subsidies

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Change in Supply

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

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Change in Supply

• If, technology is used to create a new orange
  tree that can withstand very cold temperatures.
  New orange groves are developed in the Midwest.
• Suppliers will increase more oranges.
• The supply for oranges will increase.
• A change in supply means that there is an
  increase or decrease in the number of units
  produced throughout the range of prices at which
  they are offered.

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Change in Supply

• S1

• S2

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Supply Demand

• How does supply and demand interact and how does
  that interaction determine the prices that
  prevail in our economy?

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Equilibrium

• Equilibrium or market clearing price is at the
  point where quantity demanded equals quantity
  supplied.
• Equilibrium is the point at which there tends to
  be no movement unless demand or supply changes.
• Equilibrium is a stable point.
• Equilibrium is at a point where no is completely
  happy with the equilibrium price.
• 1. Buyers would like it lower sellers like it
  to be higher.

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Supply and Demand Determine Price, Quantity

• The forces of supply and demand operate together,
  in a free market, to determine the price of a
  product.
• When the quantity demanded equals the quantity
  supplied, price will be an equilibrium price and
  the corresponding quantity will be at an
  equilibrium quantity therefore, the market is in
  a state of equilibrium.

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Supply Demand Graph