Prices and Markets

AG BM 102

Introduction

• Prices change all the time• The reason is because of changes in

supply and/or demand• This happens in a market• A market is many things, but essentially it

is where suppliers and demanders meet

Market – the context of transactions between buyers

and sellers of the same good or service

A Market

• Where the prices are determined• Where the terms of trade are negotiated• May be defined as a place, a time, a group

of buyers or sellers, the level of the marketing system

Equilibrium

• Occurs where supply and demand curves meet

• Defines a price and a quantity that clears market

• Sends message to those in the market about preferences

An Example – Beef Demand

Price/lb. Quantitylb./cap.

Price/lb. Quantitylb./cap.

$5.00 50 $3.75 75

$4.75 55 $3.50 80

$4.50 60 $3.25 85

$4.25 65 $3.00 90

$4.00 70 $2.75 95

An Example – Beef Supply

Price Quantity Price Quantity

3.00 60 4.25 72.5

3.25 62.5 4.50 75

3.50 65 4.75 77.5

3.75 67.5 5.00 80

4.00 70 5.25 82.5

Q P 150 20

Q P 30 10

Q P 150 20Q P 30 10

150 20 30 10 P P

120 30 P

P and Q 4 70

Demand

Supply

Demand = Supply

Why is it stable?

• If P is too low, quantity demanded exceeds quantity supplied and price is bid up

• If P is too high, quantity supplied exceeds quantity demanded and price falls

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

5

10

15

20

25$/

cwt.

Class IIIavg

Class III Milk Price

Why does this happen?

• Why does a small shift in supply cause the price to change by so much?

• Demand is so inelastic!• The only way to absorb the additional milk

is to torpedo the price

What happens when a line moves?

• In this graph, the milk supply decreased• Supply curve shifts• New equilibrium at a higher price• Sometimes the demand curve shifts• Same idea – move a line, new equilibrium• Increase in demand – higher price• Decrease – lower price

What changed?

• If demand increases – the line moves• It crosses supply at a new point• An increase in demand causes an

increase in QUANTITY SUPPLIED• In general, one line moves & you move

along the other line to the new equilibrium

Efficient Markets

• Present price incorporates all known information

• Who will sell you 100 shares Coca Cola when you want to buy?

• Winner’s Curse

Winner’s Curse

Concluding Comments

• Market defines price and quantity• Sends message to everyone about

conditions• Regulates decisions• Becomes interesting when a line moves