analysis of a market, supply and demand moraine park technical college
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Analysis of a Market, Supply and Demand
Moraine Park Technical College
Introduction
What is a Market?
Any place, mechanism, or condition which allows buyers and sellers an opportunity to conduct voluntary transactions.
Market Conditions
A. The focus is on the interaction between buyers and sellers
B. Buyers and sellers communicate with each to facilitate the exchange of goods at agree upon prices
C. Individual liberty is promoted as each buyer or seller decides whether or not to engage in voluntary exchange with others.
Market Conditions
Economic efficiency is promoted because resources will be allocated to their highest valued uses as determined by the cooperation between buyers and sellers.
Invisible Hand
Markets generate a process through which the plans and activities of individuals, families, businesses, and other private organizations are brought into better coordination with each other.
Invisible Hand
There is a spontaneous order which develops without the planning of any central authority (government)
The order develops from the interaction of individuals in free markets
The order is a product of human action, but not of human design
Demand & Supply
1. The buyers’ willingness and ability to purchase goods at various prices is called Demand
2. The sellers willingness and ability to part with goods at various prices is called Supply
Major Markets
Product Market: Firms sell their output to households and other firms.
Labor Market: Workers are hired or labor services are purchased.
Capital Market: Funds are raised and transferred between lenders and borrowers.
Competitive Market Model
1. Many buyers and sellers acting independently 2. Goods sold are sufficiently alike so buyers can
choose from any one seller. 3. Buyers and sellers are informed about prices
and the quality of good. 4. No one person or group has any control over
the price 5. Although many markets are not perfectly
competitive as described in 1-4 above, they function as if they were.
Market Communication
Price is how we communicate with each other in a market.
Price information permits coordination between the plans of consumers and the plans of producers, thus promoting both economic productivity and social harmony.
Market Prices
Market prices communicate crucially important information:
1. To consumers about product availability. 2. To producers about consumer preferences 3. To individuals above the relative value of
particular kinds of knowledge and skills
Market Prices
Prices ration resources and goods 1. When something is scarce, the
quantity of it is insufficient to allow everyone to have as much as they like.
2. There must be some method of determining who gets how much of scarce things
Market Prices
Price acts as a message to the market participants.
The price system is the messenger. 1. The price system delivers a message
about changing market conditions. 2. The price system delivers does not
create the changing market conditions.
What, How, And For Whom To Produce Is The Function of Price
What What is produced is determined by the
dollar votes that we cast for things and by the dollar costs of producing those things.
What, How, And For Whom To Produce Is The Function of Price
How How goods are produced is determined as
business firms compare the relative prices of resources-land, labor, physical capital, human capital and entrepreneurship.
Firms want to develop lowest-cost combination of resources.
What, How, And For Whom To Produce Is The Function of Price
Whom For whom to produce is determined by
the price the market creates for resources that people own-things like land, capital, and our labor services.
Demand
Relates to the price that you are willing to pay, as well as a variety of factors, for different quantities of a good or service
Demand refers to: 1. Various amounts of good and service. 2. Various prices buyers will purchase. 3. At a specific time
Law of Demand
When the price of a good goes up, people buy less of it, other things being equal.
When the price of a good goes down, people buy more of it, other things being equal.
Demand Relationship
There is a negative, or inverse relationship between the price of any good or service and the quantity demanded, holding other factors constant.
Money and Relative Prices
The price paid in dollars for any good or service at
any point in time is called its money price,
also called absolute, nominal or current price.
The price of a commodity expressed in terms of another commodity or the weighted average price
of all other commodities is called relative price.
Quantity Demanded, Inverse to Price
Two Reasons Substitution effect, is the tendency of people to
substitute in favor of cheaper commodities and against more expensive commodities.
Real-income effect, the change in people’s purchasing power that occurs when, other things equal, the price of one good that they purchase changes.
Demand Schedule
A table that shows us how much the quantity demanded for a particular item will vary at different prices that might be charged.
Demand Schedule for Oranges
Price perPound
# of units QuantityDemanded
$2.20 400 400
$2.00 1000 1000
$1.80 1600 1600
$1.60 2200 2200
$1.40 2800 2800
$1.20 3400 3400
$1.00 4000 4000
Quantity Demanded
Each individual price-unit combination is referred to as QUANTITY DEMANDED
Demand Curve
Demand curve is a graphic representation of the demand schedule.
A negatively sloped line showing the inverse relationship between price and the quantity demanded.
Demand Curve
Two Classifications of a Demand Curve Individual Market
Demand Curve
The Demand Curve slopes downward and to the right.
1. As price drops, we move down the vertical axis.
2. As price drops, we move to the right on the horizontal quantity axis
Demand Curve For Oranges
GF
ED
C
AB
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
0 1000 2000 3000 4000 5000
Quantity Demanded
Price
Per
Pou
nd
Demand Curve
Each individual point on the graph shows the quantity demanded at the relevant price.
All points taken together (connected by the line) show the DEMAND for oranges.
Change In Quantity Demanded
Only one factor will cause a change in quantity demanded and that is a change in price of the product being considered.
What happens to quantity demanded if the price of oranges drops from $2.00 to $1.60? Or if the price of oranges rises from $1.20 to $1.60?
Change In Quantity Demanded
d
B
A
$1.00
$1.20
$1.40
$1.60
$1.80
$2.00
$2.20
$2.40
400 800 1200 1600 2000 2400 2800 3200 3600 4000
Quantity Demanded
Pri
ce P
er P
ound
Change in Quantity Demanded
The quantity demanded would increase from 1,000 to 2,200 pounds of oranges.
We moved from one price-unit combination (P1,Q1) to another price-unit combination (P2,Q2).
We move down along the original demand curve when the quantity demanded increases.
•Assume: Prices of oranges drops from $2.00 per pound to $1.60
Change in Quantity Demanded
d
B
A
$1.00
$1.20
$1.40
$1.60
$1.80
$2.00
$2.20
$2.40
400 800 1200 1600 2000 2400 2800 3200 3600 4000
Quantity Demanded
Pri
ce P
er
Pound
•Q1•Q2
•P1
•P2
•Assume: Prices of oranges rises from $1.20 per pound to $1.60.
Change in Quantity Demanded
The quantity demanded would decrease from 3,400 to 2,200 pounds of oranges.
We moved from one price-unit combination (P1, Q1) to another price-unit combination (P2, Q2).
We move up along the original demand curve when the quantity demanded decreases.
•Assume: Prices of oranges rises from $1.20 per pound to $1.60.
Change in Demand
A change or shift in demand causes the entire curve to move
The change occurs due to changes in factors other than price
Example: Income for Orange Consumers Rises
Factors that Influence Change in Demand
A change in the level of consumer income. A change in tastes or preferences of consumers. A change in the prices of related goods. A change in buyer’s expectations about future prices. A change in population: size and age composition.
Change in Demand
To show a change in demand on a graph, you must shift the entire demand curve.
When demand increases, the demand curve shifts to the right or outward.
When demand decreases, the demand curve shifts the left or inward.
Change in Demand
$1.00
$1.20
$1.40
$1.60
$1.80
$2.00
$2.20
$2.40
400 800 1200 1600 2000 2400 2800 3200 3600 4000
Quantity Demanded
Pri
ce P
er
Pound
•Assume: Income of Orange Consumers Rises
•d
•d1
Change in Demand
If, Income rises, then Consumers will purchase more oranges The demand for oranges will increase A change in demand means that there is an
increase or decrease in the number of units purchased throughout the range of prices at which they are offered
Supply
A schedule showing the relationship between price and quantity supplied, other things being equal, for a specified period of time.
Supply refers to: 1. Various amounts of a good and service. 2. Various prices sellers will produce. 3. At a specific time.
Law of Supply
At higher prices, a larger quantity will generally be supplied than a lower prices, all other things held constant.
At lower prices, a smaller quantity will generally be supplied than at higher prices, all other things held constant.
Supply Relationship
There is a positive, or direct relationship between the price of any good or service and the quantity supplied, holding other factors constant.
Quantity Supplied, Direct to Price
Two Reasons Incentives for Increasing Production Firms will
find it more rewarding monetarily than before to spend more of their time and resources, given a price increase.
Law of Increasing Costs As society takes more and more resources and applies them to the production of any specific item, the opportunity cost for each additional unit produced increases.
Supply Schedule
A table that shows how much the quantity supplied for a particular item will vary at different prices that might be charged.
Supply Schedule for Oranges
Price perpound
# of units QuantitySupplied
$2.20 3400 3400
$2.00 3000 3000
$1.80 2600 2600
$1.60 2200 2200
$1.40 1800 1800
$1.20 1400 1400
$1.00 1000 1000
Quantity Supplied
Each individual price-unit combination is referred to as QUANTITY SUPPLIED
Supply Curve
Supply curve is a graphic representation of the supply schedule
A positive sloped line showing the direct relationship between price and the quantity supplied.
Supply Curve
The Supply Curve slopes upward and to the right.
1. As the price rises, we move up the vertical axis.
2. As the price rises, we move to the right on the horizontal quantity axis.
Supply Curve For Oranges
GF
ED
C
AB
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
0 1000 2000 3000 4000 5000
Quantity Supplied
Pri
ce P
er
Pound
Supply Curve
Each individual point on the graph shows the quantity supplied at the relevant price.
All points taken together (connected by the line) show the SUPPLY for oranges.
Change In Quantity Supplied
Only one factor will cause a change in quantity supplied and that is a change in price of the product being considered.
What happens to quantity supplied if the price of oranges rises from $1.80 to $2.20? Or, if the price of oranges drops from $1.60 to $1.20?
Change in Quantity Supplied
A
B
$1.00
$1.20
$1.40
$1.60
$1.80
$2.00
$2.20
$2.40
400 800 1200 1600 2000 2400 2800 3200 3600 4000
Quantity Supplied
Pri
ce P
er P
ound
•P1
•P2
•Q1 •Q2
•Assume: Prices of oranges rises from $1.80 per pound to $2.20.
Change In Quantity Supplied
A
B
$1.00
$1.20
$1.40
$1.60
$1.80
$2.00
$2.20
$2.40
400 800 1200 1600 2000 2400 2800 3200 3600 4000
Quantity Supplied
Pri
ce P
er P
ound
•P1
•P2
•Q1•Q2
•Assume: Prices of oranges drops from $1.60 per pound to $1.20
Change In Quantity Supplied
The quantity supplied would increase from 2,600 to 3,400 pounds of oranges.
We moved from one price-unit combination (P1,Q1) to another price-unit combination (P2,Q2).
We move up along the original supply curve when
the quantity supplied increases.
•Assume: Prices of oranges rises from $1.80 per pound to $2.20.
Change In Quantity Supplied
The quantity supplied would decrease from 2,200 to 1,400 pounds of oranges.
We moved from one price-unit combination (P1,Q1) to another price-unit combination (P2,Q2).
We move down along the original supply curve when the quantity supplied decreases.
•Assume: Prices of oranges drops from $1.60 per pound to $1.20
Change in Supply
A change or shift in supply causes the entire curve to move.
The change occurs due to changes in factors other than price.
Example: New machinery to harvest oranges.
Factors that Influence Change in Supply
1. A change in the cost of production 2. A change in the number of suppliers 3. A change in the supplier’s expectations about future
prices 4. A change in technology and productivity 5. A change in taxes and subsidies
Change in Supply
To show a change in supply on a graph, you must shift the entire supply curve.
When supply increases, the supply curve shifts to the right or outward.
When supply decreases, the supply curve shifts to the left or inward.
Change in Supply
If, technology is used to create a new orange tree that can withstand very cold temperatures. New orange groves are developed in the Midwest.
Suppliers will increase more oranges. The supply for oranges will increase. A change in supply means that there is an
increase or decrease in the number of units produced throughout the range of prices at which they are offered.
Change in Supply
$1.00
$1.20
$1.40
$1.60
$1.80
$2.00
$2.20
$2.40
400 800 1200 1600 2000 2400 2800 3200 3600 4000
Quantity Supplied
Pri
ce P
er
Pound
•S1 •S2
Supply & Demand
How does supply and demand interact and how does that interaction determine the prices that prevail in our economy?
Equilibrium
Equilibrium or market clearing price is at the point where quantity demanded equals quantity supplied.
Equilibrium is the point at which there tends to be no movement unless demand or supply changes.
Equilibrium is a stable point. Equilibrium is at a point where no is completely happy with
the equilibrium price. 1. Buyers would like it lower; sellers like it to be higher.
Supply and Demand Determine Price, Quantity
The forces of supply and demand operate together, in a free market, to determine the price of a product.
When the quantity demanded equals the quantity supplied, price will be an equilibrium price and the corresponding quantity will be at an equilibrium quantity; therefore, the market is in a state of equilibrium.
Supply & Demand Graph
1
Quantity
Pri
ce