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

Analysis of a Market,
Supply and Demand
Moraine Park
Technical College
Introduction
What is a Market?
Any place, mechanism, or condition
which allows buyers and sellers an
opportunity to conduct voluntary
transactions.
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.
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.
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.
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
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
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.
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.
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.
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


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
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.
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.
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.
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.
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
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.
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.
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,
current price.

nominal or
The price of a commodity expressed in terms of
another commodity or the weighted average price
of all other commodities is called relative
price.
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.
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.
Demand Schedule for Oranges
Price per
Pound
$2.20
# of units Quantity
Demanded
400
400
$2.00
1000
1000
$1.80
1600
1600
$1.60
2200
2200
$1.40
2800
2800
$1.20
3400
3400
$1.00
4000
4000
Quantity Demanded

Each individual price-unit combination is
referred to as QUANTITY DEMANDED
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.
Demand Curve



Two Classifications of a Demand Curve
Individual
Market
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
Price Per Pound
Demand Curve For Oranges
$2.50
A
$2.00
B
C
$1.50
D
E
$1.00
F
G
$0.50
$0.00
0
1000
2000
3000
4000
Quantity Demanded
5000
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.
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?
Change In Quantity Demanded
Price Per Pound
$2.40
$2.20
A
$2.00
$1.80
B
$1.60
$1.40
$1.20
$1.00
400
d
800
1200
1600
2000
2400
2800
3200
3600
4000
Quantity Demanded
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.
Change in Quantity Demanded
•Assume: Prices of oranges rises from $1.20 per pound to $1.60.
$2.40
•P2
•P1
Price Per Pound
$2.20
$2.00
$1.80
B
$1.60
$1.40
A
$1.20
$1.00
400
d
800
1200
1600
2000
2400
•Q2
2800
3200
3600
•Q1
Quantity Demanded
4000
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.
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
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.
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.
Change in Demand
•Assume: Income of Orange Consumers Rises
$2.40
Price Per Pound
$2.20
$2.00
$1.80
$1.60
$1.40
•d1
$1.20
$1.00
400
800
1200
1600
2000
2400
2800
3200
3600
Quantity Demanded
•d
4000
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
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.
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.
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.
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.

Supply Schedule

A table that shows how much the
quantity supplied for a particular item will
vary at different prices that might be
charged.
Supply Schedule for Oranges
Price per
pound
$2.20
# of units Quantity
Supplied
3400
3400
$2.00
3000
3000
$1.80
2600
2600
$1.60
2200
2200
$1.40
1800
1800
$1.20
1400
1400
$1.00
1000
1000
Quantity Supplied

Each individual price-unit combination is
referred to as QUANTITY SUPPLIED
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.
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.
Price Per Pound
Supply Curve For Oranges
$2.50
$2.00
$1.50
$1.00
F
G
E
D
C
B
A
$0.50
$0.00
0
1000
2000
3000
4000
Quantity Supplied
5000
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.
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?
Change in Quantity Supplied
•Assume: Prices of oranges rises from $1.80 per pound to $2.20.
$2.40
Price Per Pound
•P2
•P1
$2.20
B
$2.00
$1.80
A
$1.60
$1.40
$1.20
$1.00
400
800
1200 1600 2000 2400 2800 3200 3600 4000
•Q1
•Q2
Quantity Supplied
Change In Quantity Supplied
•Assume: Prices of oranges drops from $1.60 per pound to $1.20
$2.40
Price Per Pound
$2.20
•P1
•P2
$2.00
$1.80
$1.60
A
$1.40
$1.20
$1.00
400
B
800
1200 1600 2000 2400 2800 3200 3600 4000
•Q2
•Q1
Quantity Supplied
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.
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.
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.
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 supplier’s expectations about future
prices
4. A change in technology and productivity
5. A change in taxes and subsidies
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.
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.
Change in Supply
$2.40
•S1
Price Per Pound
$2.20
$2.00
$1.80
$1.60
$1.40
$1.20
$1.00
400
800
1200 1600 2000 2400 2800 3200 3600 4000
Quantity Supplied
•S2
Supply & Demand

How does supply and demand interact
and how does that interaction determine
the prices that prevail in our economy?
Equilibrium

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


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.
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.
Price
Supply & Demand Graph
1
Quantity