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, the 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.Quantity lb./cap. Price/lb.Quantity lb./cap. $5.0050$ $4.7555$ $4.5060$ $4.2565$ $4.0070$2.7595

An Example – Beef Supply PriceQuantityPriceQuantity

Demand Supply Demand = Supply

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

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

Efficient Markets Present price incorporates all known information Who will sell you 100 shares Coca Cola when you want to buy? Winner’s Curse

Concluding Comments Market defines price and quantity Sends message to everyone about conditions Regulates decisions Becomes interesting when a line moves