Download 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
Market – the context of
transactions between buyers
and sellers of the same good or
service
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, a level of the
marketing system
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
An Example – Beef Demand
Price/lb.
Price/lb.
$5.00
Quantity
lb./cap.
50
$3.75
Quantity
lb./cap.
75
$4.75
55
$3.50
80
$4.50
60
$3.25
85
$4.25
65
$3.00
90
$4.00
70
$2.75
95
An Example – Beef Supply
Price
Quantity
Price
Quantity
3.00
60
4.25
72.5
3.25
62.5
4.50
75
3.50
65
4.75
77.5
3.75
67.5
5.00
80
4.00
70
5.25
82.5
Q  150  20 P
Q  30  10 P
Demand
Q  150  20 P
Supply
Q  30  10 P
Demand = Supply
150  20 P  30  10 P
120  30 P
P  4 and
Q  70
Why is it stable?
• 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
Class III Milk Price
25
Class III
average
futures
20
$/cwt.
15
10
5
0
2005
2006
Source: USDA
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
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
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
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
Kinds of changes
•
•
•
•
•
•
Input price rises
Competing good goes on sale
Income falls
Health news
New production technique
Etc.
Efficient Markets
• Present price incorporates all known
information
• Who will sell you 100 shares Coca Cola
when you want to buy?
• Winner’s Curse
Winner’s Curse
Concluding Comments
• Market defines price and quantity
• Sends message to everyone about
conditions
• Regulates decisions
• Becomes interesting when a line moves