Prices and Markets AG BM 102 Introduction Prices

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. $5. 00 Quantity lb. /cap. 50 $3. 75 Quantity lb. /cap. 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 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

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

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 increased Supply curve shifts New equilibrium at a lower 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?

Concluding Comments • Market defines price and quantity • Sends message to everyone about conditions • Regulates decisions • Becomes interesting when a line moves