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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