Transcript The Market
THE MARKET Objectives 1. Explain the concept of a market. 2. Understand the law of demand and the law of supply. 3. Differentiate between a change in quantity demanded (supplied) and a change in demand (supply). 4. Explain the interaction of demand and supply and how the equilibrium price is determined in the market. 5. Understand price elasticity and the total revenue approach for elasticity in relating to market conditions. 6. Understand the concept of income elasticity and cross- price elasticity. BOYCE FAMILY MARKET When is the last time you went to the market on a Saturday? Have you really paid attention to what happens there? The local farmers market gives us a good glimpse into how markets work; buyers are exposed to a variety of goods and services that vary in quality. Do you think that the price of these products are “set in stone” or will the prices fluctuate? How does this relate to the larger markets? Fredericton Car Auction How does an auction differ from the farmers markets that we are familiar with? How does an auction compare to Ebay? Auctions act slightly different than a farmers market as consumers/buyers take an active role in determining a price for a vehicle. Although the buyers determine the final value the sellers often start the bidding at a certain value. The more buyers at an auction and they more money they have to spend will mean the higher the prices will be. Regardless of the type of market they all establish a price and provide a place for an exchange of goods and services. A market describes the interaction of buyers and sellers for the purpose of making an exchange of goods or services and establishing a price for them. Markets exist for any commodity or service that has a price. TRADITIONAL MARKETS Markets do not need money to operate although money is used as a medium of exchange in most markets. Prior to The Code of Hammurabi in ancient Babylon over 3700 years ago people have been exchanging some sort of currency. Before the creation of currency we still had a market that relied on the barter system. Even today we still have primitive societies that trade goods and services with the exchange of money. When I go home at the end of a long work day I do not have any tangible “good” that I can trade or sell. The papers that I mark and tests that I correct do not have any value. Money solves this problem as it gives a value to my occupation and what I do. In a traditional barter system two individuals would have to find one another and exchange goods. This is often quite difficult as both parties need to be present and willing. The introduction of money also solves this issue as all parties can exchange money for products and services. Can you think of any modern day example of an exchange of goods or services without the use of money? THE CONCEPTS OF DEMAND Consumers’ demand or desire for various goods and services is represented by the quantity of goods and services they are willing and able to purchase. Consumer preferences are transferred to the market in terms of the goods and services that consumers buy. The nature of the market is dependent on the changes in consumer demands. Ex. The rise in beer enthusiasts, possible due to the “hipster” generation has led to a demand for craft beer. FACTORS THAT AFFECT DEMAND Price – If you don’t think that price can affect demand then just go to a Black Friday sale or to Future Shop on Boxing Day. Keep in mind that consumers often purchase more when a price is lower. Change in the price of substitute products – the price of competing products can also influence demand for a specific item. Ex – cheaper gift bags has made them an economical and convenient substitute for wrapping paper. Change in the price of complementary products – a complementary product is one that is used in conjunction with the product in question. Ex. If mortgage rates increase less homes are purchased. Income – Changes in general levels of income have an effect on product demands. Ex. When wages increase we often see sales of luxury items increase. Foreign vacations and backyard pools are two purchases that are linked to income increases. Tastes and Preferences – A major influence on consumer demands in regards to preferences is advertising. Ex. The demand for organic food in local grocery stores. Expectations of future prices – If consumers anticipate an increase for a product in the near future they will be more likely to purchase more product in the present. Ex’ the stock market is a perfect example if this trend. Number and characteristics of buyers – As populations continue to increase so will the demand for many products. Not only will just the population affect demand but so will the age of that population. Ex. The aging Baby Boomer generation has a ripple affect on many markets. Expectations of future income – The increases and decreases in salary will factor into the demands of consumers. Ex. A family that has learned they will be expecting a child will reconsider a larger purchase as the mother will probably take maternity leave and have a reduced income. TO MAKE THINGS EASIER… In order to simplify the analysis of demand, all factors influencing demand, other than price, remain constant. CONSUMER RESPONSE TO PRICE CHANGE How do you respond to price changes? When the price of a product increases consumers may substitute towards a relatively cheaper product When the price of a product increases, less of the product is purchased at the current level of income. The inverse relationship between price and quantity demanded can be represented by a demand schedule and graphically by a demand curve. The inverse relationship between price and quantity demanded is referred to as the law of downward-sloping demand. CHANGES IN DEMAND Consumer demand for a product will change over time. What do you think will influence consumer demand for a product such as sandwiches? Many factors will influence consumer demand, including: competing products, changes to consumer income, substitute pricing … There is a difference between a change in demand and a change in quantity demanded. But a change in the good’s own price leads to a change in the quantity demanded NOT a change to the entire demand. A change in a constant factor affecting demand will change the entire demand for a good or service.