Title: What is a market
1What is a market?
Examples commodities market, stock market,
classified advertising section of the newspaper,
e-bay, market for cocaine...
- Any environment in which buyers and sellers
communicate to exchange goods or services.
2Competitive Markets
- Buyers and sellers are price takers There are so
many buyers and sellers, that no single buyer or
seller has the ability to influence the market
price. - Smallness each buyer/seller is so small relative
to the size of the market, that changes in
production have no influence on the market price
or on the actions of other firms. - No barriers to entry
- Each firms output is indistinguishable from any
other firms. - Consumers have all necessary information about
prices, products and available technology no
firm or consumer have an advantage over another. - Firms are in business to earn profits.
3Demand
- The number of units an individual is willing and
able to purchase at each price holding constant
all other factors that may influence his/her
decision.
4The Law of Demand
Demand Curves Slope DOWN to the right.
Implies that
5What accounts for the law of demand?
- People tend to substitute goods whose price has
gone up
6Quantity Demanded
- The only determinant of the Quantity Demanded is
the price.
7The Demand Curve
- The demand curve is the graphic representation of
the law of demand. - The demand curve slopes downward and to the
right. - As the price goes up, the quantity demanded goes
down and vice versa.
8The Demand Curve
Price (per unit)
She will buy 0 units
- The Quantity Demanded is
- The number of units a household would buy at each
market price
10
She will buy 3 units
5
She will buy 7 units
4
D0
If the market price is 4
3
7
0
If the market price is 5
Quantity Demanded (Number of Units Purchased)
If the market price is 10
9The Ceteris Paribus Assumption
- Other things constant means that all other
factors that affect the analysis are assumed to
remain constant, whether they actually remain
constant or not.
10Ceteris Paribus
- A households decision about how many units of a
product to demand is also affected by - Prices of Other Goods (P)
- INCOME available (Y)
- TASTES AND PREFERENCES (T)
- EXPECTATIONS with respect to future income,
wealth, and prices (E)
As price drops, all other things constant, the
quantity demanded increases
ceteris paribus
11Annas Demand Schedule
150
120
100
50
D
30
0
0
6
10
20
24
30
12Changes in Quantity Demanded vs. Changes in
Demand
Important Distinction!
Changes in quantity demanded are the result of
price changes.
Moving Along a Demand Curve
Changes in demand are the result of changes in
all other determinants of demand (PYTE)
Shift the Demand Curve
13Price Changes represent a Movement Along the
Demand Curve
150
A drop in price from 100 to 50
120
A movement Along
100
Caused a change in quantity demanded
from 10 to 20
50
30
D
0
20
10
0
6
24
30
14Determinants of Quantity Demanded
- Prices ONLY!
- Changes in prices cause changes in quantity
demanded - A movement along the demand curve.
15When Income Increases
At each price now she can afford to buy more units
The entire line shifts!
150
A shift in Demand
120
100
50
30
0
6
10
20
24
30
0
11
17
21
31
35
41
Instead of 24
Instead of 30
Instead of zero units
Instead of 6
Instead of 10
Instead of 20
16Determinants of Demand
- 1. Income
- Changes in Income cause changes in Demand
- A shift of the Demand curve.
17Consider the Demand for Gasoline.
Suppose consumer incomes rise. What will happen
to the demand for gasoline?
18Demand for gasoline
Price
Demand shifts to the right.
D2
D1
0
Quantity demanded
19Normal Goods
- Goods that people buy more when their income
increases - Goods that people buy less when their income
decreases - Most goods we buy are Normal Goods
Demand for Normal Goods changes in the same
direction as income changes
20Demand for Normal Goods Increases when Income
Increases
Price
Demand shifts to the right.
D2
D1
0
Quantity demanded Normal Good
21Inferior Goods
- Goods that people are forced into buying when
incomes drop. - Goods that people buy less or stop buying when
income increases. - Inferior goods are bought only out of necessity
Demand for Inferior Goods changes in the opposite
direction as income changes
22Demand for Inferior Goods Decreases when Income
Increases
Price
Demand shifts to the left.
D1
D2
0
Quantity demanded Inferior good
23Consider the Demand for Cars.
Suppose consumer incomes rise. What will happen
to the demand for cars?
24Demand for cars
Price
Demand shifts to the right.
D2
D1
0
Quantity demanded
25Demand for Public Transportation
Demand for public transportation decreases
Price
Demand for public transportation shifts to the
left.
D1
D2
0
Quantity demanded
26Determinants of Demand
- Income
- Changes in Income cause changes in Demand
- A shift of the Demand curve.
Demand for normal goods shift to the right
When Income Increases
Demand for inferior goods shifts to the left
Demand for normal goods shift to the left
When Income decreases
Demand for inferior goods shifts to the right
27Determinants of Demand
- Prices of Related goods Substitute Goods
- Goods that can serve as replacements for one
another - When one of the goods becomes more expensive,
demand for the other good increases. - Perfect substitutes are identical products
from the point of view of the buyer.
28Substitute Goods
- Fuel oil, natural gas (used for heating or
electricity), coal, nuclear fuels, windmills, etc - Butter and margarine
- Wood and bricks
- Cellular phones and public pay phones
- Compact discs and cassettes
- Different brands of the same product.
29Consider the Demand for MP3 players.
Suppose price of an Apple Ipod increases. What
will happen to the demand for all other MP3
players?
30Demand for MP3 Players
Price
Demand shifts to the right.
D2
D1
0
Quantity demanded
31Determinants of Demand
- Prices of Other Goods Complements
- Goods that are used together
- When one becomes more expensive, we buy fewer
units of both goods. - When the price of one increases, demand for the
other decreases.
If the price of a complement of good X
increases, Demand for X will decrease the demand
curve for X shifts to the left.
32Complement Goods
- Hamburgers and hamburger buns
- Video game console and video games
- Computers and software
- Golf clubs and golf balls
- Hamburgers and French fries
- Cars and gasoline
33Consider the Demand for Songs at the Itunes Music
Store.
Suppose price of an Apple Ipod decreases. What
will happen to the demand for Itunes songs?
34Consider the Demand for Itunes Songs.
Price
Demand shifts to the right too
D2
D1
0
Quantity demanded
35Determinants of Demand
- Income
- Changes in Income cause changes in Demand
- A shift of the Demand curve In the same
direction if Normal, in the opposite direction if
inferior. - Prices of Related Goods
- Changes in prices of related goods cause changes
in Demand - An increase in the price of a substitute causes
an increase in Demand (shift to right) for the
good. - An increase in the price of a complement, causes
a decrease in Demand (shift to left) for the
good.
36Determinants of Demand
- Expectations consumer beliefs about what will
happen in the future. - When consumers expect an increase in price of a
good in the future, they will increase their
purchases of the good TODAY.
An Increase in Demand
A shift to the right in the demand for good A
37Will this announcement cause a shift in Demand
for Toshiba Notebooks? OR A Movement Along the
demand for Notebooks?
- By the end of September, Toshiba is expected to
bring into the market a new cheaper version of
their thin notebooks
38Will the announcement cause a shift in Demand for
French Wine? OR A Movement Along the demand for
French wine?
- The current trade agreement between the US and
France will expire at the end of September. With
no new agreement in the works, markets are
preparing for the re-establishment of tariffs and
other trade barriers on French goods.
39Determinants of Demand
- Expectations
- When consumers expect an increase in their
incomes in the future, consumers increase their
purchases of normal goods TODAY.
An Increase in Demand
A shift to the right in the demand for normal
goods
40News of an impending recession hit Wall Street
as expected
What is the effect of an expected downturn in the
economy on demand for stocks?
41Determinants of Demand
- Tastes and Preferences
- When consumers tastes and preferences change,
their demand for goods also changes even though
prices remain unchanged. - Consumers become concerned about the safety of
eating imported poultry.
A Decrease in Demand
A shift to the left in the demand for poultry
42Choose the arrow that best represents the effect
a
c
b
d
43- The rental price of a video movie falls. What is
the effect of this price drop in the market for
rented videos? - The rental price of a video movie falls. What
happens in the market for movie tickets? - The price of VCRs increases. What happens in the
market for rented videos? - The price of a movie ticket increases. What
happens in the market for VCRs? - The price of lettuce increases. What happens in
the market for lettuce? - The price of soybeans decrease. What happens in
the market for soybeans? - As the season progresses, it is clear that the
Chicago Bulls will make it to the playoffs. What
is the effect of this event on the market for
tickets to the Chicago Bulls games?
44- In the 1990s per capita incomes in China have
risen. What is the effect of this event on the
market for computers? - A recent report established that Vioxx a popular
drug used for Arthritis may increase patients
risk of heart attack, stroke and kidney failure.
What is the effect of this event on the market
for Vioxx? - A recent report established that Vioxx a popular
drug used for Arthritis may increase patients
risk of heart attack, stroke and kidney failure.
What is the effect of this event on the market
for Arthritest and other Arthritis medications? - Gasoline prices increased due to the effects of
the hurricane. What is the effect of this event
on the market for gasoline?
45- Consumers consider crab meat and lobster
substitute goods. Suppose that the price of crab
meat increases. What is the effect of this event
on the market for lobster? - Gasoline prices will continue to rise in the
future. What is the effect of this event on the
market for large size vehicles in the U.S? - Gasoline prices continue to rise in the future.
What is the effect of this event on the market
for small size vehicles in the U.S? - In 1996 the mad cow disease scare kept
Americans from beef and beef products. What was
the effect of this event on the market for beef
in the U.S?
46Will this announcement cause a shift or a
Movement Along the Demand Curve?
- You are watching a national news broadcast. It is
reported that a typhoon is heading for the
Washington coast and that it will likely destroy
much of this years apple crop. Your roommate
says, If there are going to be fewer apples
available, Ill bet that apple prices will rise.
We should buy enormous quantities of apples now
and put them in storage. Later we will sell them
and make a killing.
47Market Demand
- Demand for a good or service can be defined for
an individual household, or for a group of
households that make up a market. - Market Demand is the sum of all the quantities of
a good or service demanded per period by all the
households buying in the market for that good or
service
48To determine the market demand from the
individual demand curves
Price
Price
DA
3.50
1.50
49180
160
140
120
100
50(No Transcript)
51What happens to the Market Demand if we add one
more consumer to the market?
The market demand increases, and the market
demand curve shifts to the right
One more determinant of demand Number of
Consumers in the market.
52Determinants of Demand
- Prices of related goods
- Incomes
- Number of consumers in the market.
- Tastes and Preferences
- Expectations
53Prices are Determined by Supply and Demand
Price Changes are the RESULT of either a change
in supply alone, a change in demand alone or a
simultaneous change in both demand and supply .