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REM 363/ENV 399 - Week 5 INTRODUCTION TO MARKET ANALYSIS

REM 363/ENV 399 - Week 5 INTRODUCTION TO MARKET ANALYSIS. Concepts in Market Analysis What is a market?* Marginal willingness to pay and the demand curve   Movement along a curve vs. shift of the curve Individual firm's supply curve vs. market supply

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REM 363/ENV 399 - Week 5 INTRODUCTION TO MARKET ANALYSIS

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  1. REM 363/ENV 399 - Week 5 INTRODUCTION TO MARKET ANALYSIS

  2. Concepts in Market Analysis • What is a market?* • Marginal willingness to pay and the demand curve   • Movement along a curve vs. shift of the curve • Individual firm's supply curve vs. market supply • Market price-output equilibrium and adjustment • Marginal vs. average costs and elasticity * system allowing buyers and sellers to exchange money for goods and services

  3. Total vs. marginal concept We are often concerned with small changes in activities, either a slight increase or decrease (marginal concept), rather than questioning whether an activity should be undertaken at all (total concept) e.g. another cup of coffee, stay an extra day, have another beer, take another potato chip, etc.

  4. Red, red wine … marginal willingness to pay and the individual’s demand curve Price ($) Price ($) 40 30 20 10 0 38 40 30 20 10 MWTP 26 MWTP 17 12 price 9 7 1 2 3 4 5 6 1 2 3 4 5 6 Bottles of wine (Quantity)

  5. Individual Demand Curves and Market Demand Curve Individual A Demand Curve Individual B Demand Curve Market Demand Curve P P P Market Price QA Q QB Q QT Note: Individual’s Demand Curve equals Individual’s “willingness to pay”

  6. Movement along the market demand curve vs. a shift in the curve Price ($) 40 30 20 10 0 Demand curve 2 Demand curve 1 0 1 2 3 4 5 6 Quantity

  7. Supply: adding workers to a winery of fixed size with diminishing returns

  8. Red, red wine … marginal cost of production $ $ 30 25 20 15 10 5 0 30 25 20 15 10 5 Marginal Cost 1 2 3 4 5 6 1 2 3 4 5 6 Quantity of wine produced (bottles)

  9. Individual Firm Supply Curves and Market Supply Firm A’s Supply Curve Firm B’s Supply Curve Market Supply Curve MC MC $ $ $ 4 10 8 18 Q Q QA QB QT

  10. Price S (MC) Market Equilibrium for Demand and Supply Market determined price P* D (MWTP) Q* Quantity Market determined quantity demanded

  11. More on production and costs … • Components of cost: • Variable costs - costs that can be varied during the time period under consideration • Fixed costs - costs that cannot be varied during the given time period • Time considerations in economic analysis: • Short run - period during which some inputs (notably capital) cannot be changed • Long run - period during which all inputs can be changed

  12. Individual Firm in the Short Run: marginal vs. average cost Cost per unit MC AC Q* Output Quantity

  13. Own Price Elasticity of Demand Price Low Elasticity Demand curve Quantity Price High Elasticity Demand curve Quantity

  14. Own Price Elasticity of Supply Supply curve Price Low Elasticity Quantity Price Supply curve High Elasticity Quantity

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