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Understanding Prices and Markets: Supply, Demand, and Equilibrium Dynamics

This introduction to prices and markets explains how prices fluctuate due to changes in supply and demand. A market is defined as a place where buyers and sellers converge, determining prices and negotiating trade terms. Key concepts include equilibrium, where supply and demand intersect, establishing a price that clears the market. The discussion also covers how shifts in supply and demand curves affect market prices and quantities. Understanding these principles is essential to grasp how market dynamics influence economic decisions.

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Understanding Prices and Markets: Supply, Demand, and Equilibrium Dynamics

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Presentation Transcript

  1. Prices and Markets AG BM 102

  2. 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

  3. Market – the context of transactions between buyers and sellers of the same good or service

  4. 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

  5. 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

  6. An Example – Beef Demand

  7. An Example – Beef Supply

  8. Demand Supply Demand = Supply

  9. 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 is it stable?

  10. 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

  11. 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

  12. 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

  13. Efficient Markets • Present price incorporates all known information • Who will sell you 100 shares Coca Cola when you want to buy? • Winner’s Curse

  14. Winner’s Curse

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

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