1. 64 1.1.3 What makes the market price change? 1) Start
Copyright Mark Van Couwenberghe, 2017 64
1.1.3 What makes the market price change?
1) Start
Sea cruises have evolved…
What makes the market price change?
PRICE MECHANISM ON COMPETITIVE MARKETS

2. Copyright Mark Van Couwenberghe, 201765
2) Theory
The market price in a competitive market will change as a results of shifts in demand and/or supply.
- factors that have an impact on the demand:
income of buyers 1
expectations of buyers 2
price of substitute product 3
price of complementary product 4
preference of buyers 5
number of buyers 6
Substitute products are:
Complementary products are:
What makes the market price change?
PRICE MECHANISM ON COMPETITIVE MARKETS

3. 66 - factors that have an impact on the supply: production costs 7
Copyright Mark Van Couwenberghe, 2017 66
- factors that have an impact on the supply:
production costs 7
technological innovation 8
productivity 9
number of sellers 10 1 6 2 7 3 8 4 9 5 10
What makes the market price change?
PRICE MECHANISM ON COMPETITIVE MARKETS

4. 67 Impact on market price of parallel shifts of the demand curve (1):
Copyright Mark Van Couwenberghe, 2017 67
Impact on market price of parallel shifts of the demand curve (1):
if the demand curve shifts to the right,
DEMAND RISES
the market price will rise to P1
the equilibrium quantity will rise to Q1 P1 Pe Qe Q1
What makes the market price change?
PRICE MECHANISM ON COMPETITIVE MARKETS

5. 68 Impact on market price of parallel shifts of the demand curve (2):
Copyright Mark Van Couwenberghe, 2017 68
Impact on market price of parallel shifts of the demand curve (2):
if the demand curve shifts to the left,
DEMAND DROPS
the market price will drop to P2
the equilibrium quantity will drop to Q2 Pe P2 Q2 Qe
What makes the market price change?
PRICE MECHANISM ON COMPETITIVE MARKETS

6. 69 Impact on market price of parallel shifts of the supply curve (1):
Copyright Mark Van Couwenberghe, 2017 69
Impact on market price of parallel shifts of the supply curve (1):
if the supply curve shifts to the right,
SUPPLY RISES
the market price will drop to P1
the equilibrium quantity will rise to Q1 Pe P1 Qe Q1
What makes the market price change?
PRICE MECHANISM ON COMPETITIVE MARKETS

7. 70 Impact on market price of parallel shifts of the supply curve (2):
Copyright Mark Van Couwenberghe, 2017 70
Impact on market price of parallel shifts of the supply curve (2):
if the supply curve shifts to the left,
SUPPLY DROPS
the market price will rise to P2
the equilibrium quantity will drop to Q2 P2 Pe Qe Q2
What makes the market price change?
PRICE MECHANISM ON COMPETITIVE MARKETS

8. coordination function
Copyright Mark Van Couwenberghe, 2017 71
The market price mechanism in a competitive market has two functions:
coordination function
signal function
demand and supply always evolve towards an equilibrium
the market price sends signals to buyers and sellers
example:
rising price >>>
signal to buyers: buy less
signal to sellers: sellers sell more
What makes the market price change?
PRICE MECHANISM ON COMPETITIVE MARKETS

9. 72 1.1.4 What is price elasticity? 1) Start What is price elasticity?
Copyright Mark Van Couwenberghe, 2017 72
1.1.4 What is price elasticity?
1) Start
What is price elasticity?
PRICE MECHANISM ON COMPETITIVE MARKETS

10. 73 What is price elasticity? PRICE MECHANISM ON COMPETITIVE MARKETS
Copyright Mark Van Couwenberghe, 2017 73
What is price elasticity?
PRICE MECHANISM ON COMPETITIVE MARKETS

11. Copyright Mark Van Couwenberghe, 201774
2) Theory
The price elasticity of demand illustrates the “strength” of the reaction of a buyer (change in quantity demanded) as a result of a price change.
Formula:
P 0 = original price
P 1 = new price
Q 0 = original quantity
Q 1 = new quantity
P E D
value:
the outcome of this calculation will always be < 0
the interpretation of the “strength” of the seller’s reaction is therefore based on the absolute value
What is price elasticity?
PRICE MECHANISM ON COMPETITIVE MARKETS

12. 75 The price elasticity ratio should be interpreted as follows: Ratio
Copyright Mark Van Couwenberghe, 2017 75
The price elasticity ratio should be interpreted as follows:
Ratio
Interpretation
Ε < 1
Demand is “price inelastic”: a given price change generates a relatively “weaker” change in quantity demanded
E = 1
Demand is “unitary price elastic”: a given price change generates a relatively “proportional” change in quantity demanded
E > 1
Demand is “price elastic”: a given price change generates a relatively “stronger” change in quantity demanded
E = 0
Demand is “perfectly price inelastic”: a given price change generates no change in quantity demanded
E = ∞
Demand is “perfectly price elastic”: a given price change generates a relatively “infinitely strong” change in quantity demanded
What is price elasticity?
PRICE MECHANISM ON COMPETITIVE MARKETS

13. 76 Price elasticity of demand is an important concept for sellers:
Copyright Mark Van Couwenberghe, 2017 76
Price elasticity of demand is an important concept for sellers:
If the demand for their product is price elastic,
a rise in price will lead to a drop in turnover
a drop in price will lead to a rise in turnover
If the demand for their product is price inelastic,
a rise in price will lead to a rise in turnover
a drop in price will lead to a drop in turnover
What is price elasticity?
PRICE MECHANISM ON COMPETITIVE MARKETS

14. 77 Graphs: Perfectly price inelastic Demand Price elastic Demand (D)
Copyright Mark Van Couwenberghe, 2017 77
Graphs:
Perfectly price inelastic Demand
(D)
Price elastic Demand
(D)
Price inelastic Demand
(D)
Perfectly price elastic Demand
(D)
What is price elasticity?
PRICE MECHANISM ON COMPETITIVE MARKETS

15. Copyright Mark Van Couwenberghe, 201778
The price elasticity of supply illustrates the “strength” of the reaction of a seller (change in quantity supplied) as a result of a price change.
Formula:
P 0 = original price
P 1 = new price
Q 0 = original quantity
Q 1 = new quantity
P E S
value:
the outcome of this calculation will always be > 0
the interpretation of the “strength” of the seller’s reaction is therefore based on the absolute value
What is price elasticity?
PRICE MECHANISM ON COMPETITIVE MARKETS

16. 79 The price elasticity ratio should be interpreted as follows: Ratio
Copyright Mark Van Couwenberghe, 2017 79
The price elasticity ratio should be interpreted as follows:
Ratio
Interpretation
Ε < 1
Supply is “price inelastic”: a given price change generates a relatively “weaker” change in quantity supplied
E = 1
Supply is “unitary price elastic”: a given price change generates a relatively “proportional” change in quantity supplied
E > 1
Supply is “price elastic”: a given price change generates a relatively “stronger” change in quantity supplied
E = 0
Supply is “perfectly price inelastic”: a given price change generates no change in quantity supplied
E = ∞
Supply is “perfectly price elastic”: a given price change generates a relatively “infinitely strong” change in quantity supplied
What is price elasticity?
PRICE MECHANISM ON COMPETITIVE MARKETS

17. 80 Graphs: Perfectly price inelastic Supply Price elastic Supply (S)
Copyright Mark Van Couwenberghe, 2017 80
Graphs:
Perfectly price inelastic Supply
(S)
Price elastic Supply
(S)
Price inelastic Supply
(S)
Perfectly price elastic Supply
(S)
What is price elasticity?
PRICE MECHANISM ON COMPETITIVE MARKETS