48 1.1.2 What is the market price mechanism? 1) Start Copyright Mark Van Couwenberghe, 2017 48 1.1.2 What is the market price mechanism? 1) Start The following table shows the demand and supply for cherries on a competitive market. P Demand Qd Supply Qs 0,10 17.000 8.000 0,15 13.500 9.000 0,20 10.000 0,25 6.500 11.000 0,30 3.000 12.000 P per 100 gr Q in 100 gr What is the market price mechanism? PRICE MECHANISM ON COMPETITIVE MARKETS

49 Draw a graph using the table: What is the market price mechanism? Copyright Mark Van Couwenberghe, 2017 49 Draw a graph using the table: What is the market price mechanism? PRICE MECHANISM ON COMPETITIVE MARKETS

50 What are your conclusions ……… ? … looking at the demand side? Copyright Mark Van Couwenberghe, 2017 50 What are your conclusions ……… ? … looking at the demand side? … looking at the supply side? What quantity will be bought / sold on this market? And at what price? Explain your last answers: What is the market price mechanism? PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 51 2) Theory The market price in a competitive market is the result of the equilibrium between demand and supply. DEMAND = SUPPLY Pe Qe What is the market price mechanism? PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 52 The demand reflects the different levels of willingness to buy at different prices. there is a negative relation between the price and the quantity demanded LAW OF DEMAND willingness to buy quantity demanded price What is the market price mechanism? PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 53 The supply reflects the different levels of willingness to sell at different prices. there is a positive relation between the price and the quantity supplied LAW OF SUPPLY willingness to buy quantity supplied price What is the market price mechanism? PRICE MECHANISM ON COMPETITIVE MARKETS

54 Graphs and maths: Demand demand curve (D) Q = a – b . P Supply (S) Copyright Mark Van Couwenberghe, 2017 54 Graphs and maths: Demand (D) demand curve Q = a – b . P Supply (S) supply curve Q = a + b . P What is the market price mechanism? PRICE MECHANISM ON COMPETITIVE MARKETS

55 Explanation of the market price mechanism: if the price is P1, Copyright Mark Van Couwenberghe, 2017 55 Explanation of the market price mechanism: if the price is P1, the willngness to sell will be higher than the willingness to buy Q s > Q d (desequilibrium) SUPPLY SURPLUS DEMAND SHORTAGE consequence: P will drop until the market reaches an equilibrium P1 Pe Qe Q d Q s What is the market price mechanism? PRICE MECHANISM ON COMPETITIVE MARKETS

56 Explanation of the market price mechanism: if the price is P2, Copyright Mark Van Couwenberghe, 2017 56 Explanation of the market price mechanism: if the price is P2, the willngness to buy will be higher than the willingness to sell Q d > Q s (desequilibrium) DEMAND SURPLUS SUPPLY SHORTAGE consequence: P will rise until the market reaches an equilibrium Pe P2 Qe Q s Q d What is the market price mechanism? PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 57 3) Research Carry-out a research in the Belgian economy to find 2 examples of markets that knew a supply surplus in recent times: Market Example of supply surplus Carry-out a research in the Belgian economy to find 2 examples of markets that knew a demand surplus in recent times: What is the market price mechanism? PRICE MECHANISM ON COMPETITIVE MARKETS

58 Market Example of demand surplus Copyright Mark Van Couwenberghe, 2017 58 Market Example of demand surplus What is the market price mechanism? PRICE MECHANISM ON COMPETITIVE MARKETS

59 4) Exercices Consider the following competitive market: Copyright Mark Van Couwenberghe, 2017 59 4) Exercices Consider the following competitive market: Q d = - 0,5 . P + 100 Q s = 2 . P – 50 P per kg Q in 1.000 kg Calculate the market equilibrium. What is the market price mechanism? PRICE MECHANISM ON COMPETITIVE MARKETS

60 2) Consider the following competitive market: Q d = 6.000 – 15 . P Copyright Mark Van Couwenberghe, 2017 60 2) Consider the following competitive market: Q d = 6.000 – 15 . P Q s = - 900 + 15 . P Calculate the market equilibrium. What is the market price mechanism? PRICE MECHANISM ON COMPETITIVE MARKETS

61 3) Consider the following competitive market: Q d = - 0,1 . P + 71 Copyright Mark Van Couwenberghe, 2017 61 3) Consider the following competitive market: Q d = - 0,1 . P + 71 Q s = 0,2 . P + 50 Calculate the market equilibrium. What is the demand and supply at a price of € 75,00? What is the market price mechanism? PRICE MECHANISM ON COMPETITIVE MARKETS

62 How do we call this specific situation? Copyright Mark Van Couwenberghe, 2017 How do we call this specific situation? What will happen with demand, supply and the price? 62 4) How does the price mechanism work on the famous flower auction of Aalsmeer (The Netherlands)? Write a text of 20 lines. What is the market price mechanism? PRICE MECHANISM ON COMPETITIVE MARKETS

63 What is the market price mechanism? Copyright Mark Van Couwenberghe, 2017 63 What is the market price mechanism? PRICE MECHANISM ON COMPETITIVE MARKETS