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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 collection of individual markets. - PowerPoint PPT Presentation
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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
3
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
1
1.5
22.5
3
0 2000 4000 6000 8000 10000 12000
Quantity
Pri
ce
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
3
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
1
1.5
2
2.5
3
0 2000 4000 6000 8000 10000 12000
Quantity
Pri
ce
D0
Change in quantity demanded
Demand for Hamburger PattiesSalmonella Threat
0
0.5
1
1.5
2
2.5
3
0 2000 4000 6000 8000 10000 12000
Quantity
Pri
ce
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
