1. 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

2. 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

3. 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

4. Copyright Mark Van Couwenberghe, 201751
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

5. Copyright Mark Van Couwenberghe, 201752
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

6. Copyright Mark Van Couwenberghe, 201753
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

7. 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

8. 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

9. 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

10. Copyright Mark Van Couwenberghe, 201757
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

11. 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

12. 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 kg
Calculate the market equilibrium.
What is the market price mechanism?
PRICE MECHANISM ON COMPETITIVE MARKETS

13. 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 = – 15 . P
Q s = P
Calculate the market equilibrium.
What is the market price mechanism?
PRICE MECHANISM ON COMPETITIVE MARKETS

14. 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

15. 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

16. 63 What is the market price mechanism?
Copyright Mark Van Couwenberghe, 2017 63
What is the market price mechanism?
PRICE MECHANISM ON COMPETITIVE MARKETS