_____________________________________________Markets

nice work if you can get it, and you can get it if you try TOPIC 3 Year 11

Role of the Market Mrkt is where buyers and sellers are in contact with each other for purpose of exchange. Must have: - product or factor - buyer - seller - market price determine solution to the economic problem. 2 types of markets Factor Markets (resource markets) Product market: -labour market - car industry - capital - fruit market - raw materials - fish market - insurance

- tourism

Product markets involve sale of final goods and services, factor markets are mrkts. where resources are bought and sold. In factor, demand is called derived demand as it occurs due to demand for final g-and-s. Price mechanism: auto. process where the price of a prod. changes until the price is reached where demand equals supply. The price is called the equilibrium price. (where market equilibrium is demand=supply)
Efficient because, a consumer willing to pay mrkt price will be satisfied, aswell as any producer offering fand-s at mrkt. Price will sell all they produce

Importance of Prices in Markets Reflect scarcity Allocation of resources (help to) A trigger for new producers (to join industry) Rationing device (enable markets to clear, remove shortages/surpluses)

Demand
Factors affecting demand

Income Price Substitute (price) Complement (price) Expected future prices Population Tastes

Individual demand

Demand of an individual
Market Demand

Demand by all consumers for a good or services (all individual demands at various prices)
Law of Demand

Consumers demand more at a lower price (and less at high price)

Demand Curve

A demand schedule graphed Slopes from top left to bottom right (ceteris paribus-all other factors kept constant) Demand schedule: Quantity Price Demanded 20 200 40 160 60 120 80 80 100 40
Movements along Demand Curve: (from price changes)

Demand Curve

Only price changes will lead to movement along the curve (expansion or contraction)

contraction in demand occurs when prices rise from P to P1 expansion in demand occurs when prices fall from P to P2
Shifts of the demand curve: (by change, in factors other than price)

A change in any other 5 factors affecting demand will lead to a shift (increase or decrease) Show more/less is demand at the same price.

Increase in demand shift of curve to right

Decrease in demand shift to left

Price elasticity of demand:

A measure of the responsiveness of demand to price change. Elastic responsive (steep graph) Inelastic little change in demand (flat) Unitary change is in equal proportions
Total Outlay method (price x quantity)

Accurate way to determine elasticity (look at revenue for producer)

Price 5 6 7 8 9 10 Quantity demanded 50 45 40 35 30 25 Total outlay = price x quantity 250 270 280 280 270 250 Elasticity

Elasticity and total outlay:

Price up, revenue up: Inelastic , revenue down: elastic (less people buying) , revenue same: Unitary

Factors affecting elasticity of demand

Luxury or necessity Any close substitutes Proportion of income spent on good (cost of good itself) Length of time since price change Addictive or not (habit-forming)
Significance of Price Elasticity:

Gov. and businesses need to understand price elasticity set a price that maximises profits

Supply
Factors affecting supply [determinant of supply]

Price of good Price of substitutes/compliments/other goods Technology Cost of Factors of Production Expected future prices Number of Suppliers
Law of Supply

States as the price of a certain good rises, the quantity supplied will rise -good profitable higher price, attracts More ppl to make
individual supply

supply from one firm

market supply

sum of all individ. firm supply of a product

Supply curve

Supply schedule graphed Slopes upwards from left to right

Movements along the supply curve

Results only from price change contraction in supply decrease in price expansion in supply increase in price
Shifts of the supply curve

From other changing factors influencing supply, not price change

(more or less supplied at same price)

increase shift right decrease shift left

Price elasticity of supply

- ref. sensitivity of quantity suppl. to change in price elastic inelastic

At one price, willing to supply infinite

quatitiy of supply fixed, regardless of price

Factors affecting Elasticity of Supply timelags after price change ability to hold and store stock excess capacity

Market Price
Market equilibrium

where at a certain price, supply = demand market clears, no excesses in supply or demand no tendency to change
through price mechanism

movement to equilibrium

expansion and contraction in supp and demand (due to price mech.)

Effect of changes in supply/demand on equilibrium

Shifts in curves

Effects of changing levels of competition and market power on price and output.

Role of Gov.
When markets do not produce desired out comes = market failure. Markt price may be too high or too low (no one buys, not profitable respectively) = some g-and-s may not be produced at all = mrkt failure Price mech. only accounts for private costs and not social costs and benefits (externalities) and thus gov. intervention Redistribute income (ceilings, floors, taxes on businesses pay for negative externalities) Supply public goods -price intervention (ceilings and floors) may lead to disequilibrium IMPOSE TAXES social costs: externalities neg. externalities -health (smoking) -pollution ceiling artificial low price floor high price

merit goods (positive externalities) subsidies to increase -education (from building schools) -public transport

Variations in Competition (market structure)

Pure competition = markt economy, Monopoly Monopolistic competition Oligopoly