Markets and Demand

Markets and Demand

Overheads

Markets

A market is a situation in which buyers and sellers can negotiate the exchange of some product or products.

A market is a group of buyers and seller with the potential to trade.

The economy is just a collectionof individual markets.

Separate, analyze, put back together Separate, analyze, put back together

Farmer’s Market

Examples of Markets

Cattle auction

Tractor market

Used car market

Markets can be of many sizes

Some markets are local

Some markets are regional

Some markets are national

Some markets are global

The purpose of the analysis determines the breadth of market we specify.

We often describe markets by the degree ofcompetition by which they are characterized.

Some markets are competitive ...

some are not.

Imperfectly competitive marketsImperfectly competitive markets

When a buyer or seller has the powerto influence the price of a product,we say that the market is imperfectly competitive

Examples

Breakfast cereal

Heavy duty trucks

Slaughter of cattle

Fructose syrup

Purely competitive marketsPurely competitive markets

When buyer or sellers in a market are

not able affect the pricenot able affect the priceof a product, we say that the market is purely competitive, or just, competitive.

When there are many buyer or sellers in a market

they are usually not able affect the pricenot able affect the priceof their product.

When there are few buyer or sellers in a market

they are often able affect the priceable affect the priceof their product.

Examples

Wheat at the production level

Unskilled labor

Futures contracts on sugar

Coffee, Sugar and Cocoa Exchange

Competitive agents

A buyer or seller (agent) is said to be competitivecompetitiveif the agent assumes or believes that themarket price is given and that the agent's actionsdo not influence the market price.

We call such an agent a price taker.

Demand for a competitive agent

The total amount of a good that a competitive agent would choose to purchase at a given price is called the quantity demandquantity demand by that agent.

The market demandmarket demand of a good is the total amount that all buyers in a marketall buyers in a market would choose to purchase at a given price.

Supply for a competitive agent

The total amount of a good that acompetitive agent would chooseto produce and sell at a given priceis called the quantity supplied by that agent.

The market supply of a good is the total amount that all sellers in a market would choose to produce and sell at a given price.

Supply and demand are specifically relevant

for competitive markets

The Demand Function

The demand function for a good is a rulethat specifies the quantity of the goodthat will be demanded at a given price

holding all other factors that affect thequantity demanded of the good constant.

The Demand Function

D h(P, ZD)

D = quantity demanded

ZD = (z1, z2, z3, . . . , zr )

P = price of the good

ZD = other factors that affect demand

The Law of Demand

The law of demand states that whenthe price of a good rises,and everything else remains the same, the quantity of the good demanded will fall.

The Demand Schedule

The demand schedule is a list showingthe quantities of a good that consumerswill choose to purchase at different prices, with all other variables held constant.

Price (per lb) Quantity demanded

.25 10000

0.5 9000

1 70001.25 60001.5 50001.75 40002 30002.25 20002.5 1000

0.75 8000

Demand for Hamburger

The Demand Curve

The demand curve is agraphical depiction of a demand schedule;

a line showing the quantity of a good or servicedemanded at various prices,

with all other variables held constant.

The Law of Demand

The law of demand says that thedemand curve has a negative slope

(slopes downward)

Demand for Hamburger Patties

0

0.5

1

1.5

22.5

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0 2000 4000 6000 8000 10000 12000

Quantity

Pri

ce

D0

Other factors in the demand function

Household income and wealth

Prices of other goods

Population or market size

Expectations

Tastes

D = h (P, income, other prices, population, expectations, tastes )

Demand depends on many things

D h(P, ZD)

Changes in Demand

A change in demandchange in demand is a changein the entire relationshipentire relationship between priceand quantity demanded.

An increase in demand means that buyerswould choose to buy more at any price.

A decrease in demand means that theywould choose to buy less at any price.

Example change in demand

.25 100000.5 9000.75 80001 70001.25 60001.5 50001.75 40002 30002.25 20002.5 1000

Price (per lb) Quantity Demanded

New QuantityDemanded

9000800070006000500040003000200010000

Salmonella Report

Changes in demand are represented by a shift in the demand curve.

Demand for Hamburger PattiesSalmonella Threat

0

0.5

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1.5

22.5

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0 2000 4000 6000 8000 10000 12000

Quantity

Pri

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D0D1

Changes in demand are represented by a shift in the demand curve.

When demand increasesincreases,the demand curve shifts to the rightright;

when demand decreasesdecreases,the demand curve shifts to the leftleft.

Changes in demand as compared to changes in the quantity demanded

Along a fixed demand curvefixed demand curve, as price changes the quantity demanded will change.

This is called a change in the quantity demanded

in contrast to a change in demandthat shifts the whole curve

Change in quantity demanded

Movement along a fixed schedule or curve

Change in demand

Change in the whole schedule or curve

Demand for Hamburger Patties

0

0.5

1

1.5

2

2.5

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0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000

Quantity

Pric

e

D0D1

Salmonella Threat

Change in quantity demanded

Change in demand

Demand for Hamburger PattiesChange in Price

0

0.5

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0 2000 4000 6000 8000 10000 12000

Quantity

Pri

ce

D0

Change in quantity demanded

Demand for Hamburger PattiesSalmonella Threat

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0.5

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1.5

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2.5

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0 2000 4000 6000 8000 10000 12000

Quantity

Pri

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D0

D1Change in demand

Factors causing changes in demand

Household income and wealth

Prices of other goods

Population or market size

Expectations

Tastes

Income and Wealth

Income is a flow variableand represents the amount that a person or firmearns over a particular period.

Wealth is a stock variable and represents the total valueof everything a person or firm owns, at a point in time,minus the total value of everything owed.

Effect of income and wealth on demand

Normal goods

The demand for most goods (normal goods) is positively related to income or wealth.

A rise in either income or wealth willincrease the demand and shift the demand curve to the right.

Effect of income and wealth on demand

Inferior goods

The demand for inferior goods is negatively related to income or wealth.

A rise in either income or wealth willdecrease the demand and shift the demand curve to the left.

Effect of prices of related goods on demand

Substitute goods

A substitute is a good that can be usedin place of some other goodand that fulfills more or less the same purpose.

A rise in the price of a substitute good will causean increase in the demand for the good,shifting the demand curve to the right.

Examples

Big Macs and Whoppers

Revlon and Maybelline eyeshadow

Dodge Caravan and Ford Winstar

Effect of prices of related goods on demand

Complementary goods

A complement is a good that is usedtogether with some other good.

A rise in the price of a complementary good will causea decrease in the demand for the good,shifting the demand curve to the left.

Examples

Hamburgers and French Fry

Running shoes and running socks

Skis and ski poles

Population and Demand

A larger population means a larger demand.

Expectations and Demand

If individuals anticipate the price of a productwill rise in the near future,they may choose to buy more of the product now,thus increasing the demand.

Expectations and Demand

If individuals anticipate the price of a productwill fall in the near future,they may choose to buy less of the product nowand wait until later to buy,thus decreasing the current demand.

The Effect of Tastes on Demand

If individuals develop a stronger taste for productthe demand will increaseand the demand curve will shift to the right.

If individual’s taste for product declines,the demand will decreaseand the demand curve will shift to the left.

Examples

Healthy food leads to a longer life

Herbal tea makes you think more clearly

Smoking causes you to die young

You lose your teeth in an accident

Your new spouse hates vegetables

The End