Transcript Hastings9-Marketsand..

Introduction to Agricultural and
Natural Resources
Markets and Market Equilibrium
FREC 150
Dr. Steven E. Hastings
Markets and Market Equilibrium
• This Outline Covers the additional parts of Chapter 8 (pages 133 – 140)
and parts of Chapter 9 (pages 145 – 148 and 155 – 158) in Penson et al.
• Major Topics
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Markets
Market Structure
Perfect Competition
Market Equilibrium
Shifts in Supply and Demand
Implications of Market Structure for Society
Imperfect Competition
Summary
Markets
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What is a Market?
– A market is an institution or an arrangement that brings buyers and sellers of a product
together.
– Examples: NYSE, retail stores, yard sales, book buy-back, antique auction, etc.
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The Role of Markets (Previous Text)
– Markets direct and coordinate the transformation (form, space and time) of resources in to
goods and services that provide utility.
– Form - involved changing the form of resources; corn vs. corn flakes, Pop Tarts.
– Space - consumers want goods and services at a particular location, regardless of where it is
produce; orange juice for breakfast.
– Time - an important factor in determining the amount of utility a good; frozen, sealed, etc.
Market Structure
• Within an economic system, the “structure” of different
product (and resource) markets can vary, depending on:
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Numbers and size of sellers
Homogeneity of the product (product differentiation)
Ease of entry and exit by firms (barriers)
The economic environment of the industry
Examples
Typical Market Structures
For sellers in the product
market:
Perfect Competition
Imperfect Competition
Monopolistic Competition
Oligopoly
Monopoly
For buyers in the input
market:
Perfect Competition
Imperfect Competition
Monopsonistic Competition
Oligopsony
Monopsony
From the Text
Advertising Creates “Difference” in Products
Perfect Competition
• Perfect Competition in a product market requires:
– Product is homogeneous (corn is corn!)
– No barriers to a firm entering or exiting the market (no patents,
licenses, etc,)
– Large number of sellers (no sellers can “set” the price)
– Information is available to all.
• An Iowa corn farmer is a good example of a perfect
competitor (seller).
Market Equilibrium
• Market Equilibrium occurs when the quantity of good offered at a price
equals the quantity consumers are willing to purchase at that same price.
– The market price is the mutually agreeable price at which buyers and
sellers exchange a good. At that price, the market is in equilibrium (the
equilibrium price): the quantity offered is the same as the quantity
demanded.
– Any price other than the equilibrium price is a disequilibrium price. At
any of these prices (supply does not equal demand), the quantity offered
and the quantity demanded are not equal and either a surplus (prices
above the equilibrium price) or shortage (prices below the equilibrium)
exists.
Graphically,
Graphically Again,
Firms are “Price Takers”
Shifts in Market Supply and Market Demand and
Create Disequilibrium
What causes
shifts in Demand?
What causes
Shifts in Supply?
Shifts in Market Supply and Market Demand and
Create Disequilibrium
A - New Health
Food Fad
C – New Technology
Lowers Cost
B – Health Scare –
Eggs, Beef, Grapes,
etc.
D – Hurricanes,
Drought, etc.
Market Disequilibrium(s)
Market Structure is Important for Society
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Perfect Competition and Imperfect Competition
– The structure of the market has many implications for the production
of goods and services, the use of resources and for society's welfare.
– Perfect Competition is considered efficient in the long-run and
Imperfect Competition is not.
Price and Output in a Competitive Market
(SR and LR)
– In the short run, a firm faces a horizontal demand schedule at the market
price. This is their MR, which is equated to their MC to determine the amount
of output to be produced. Output is determined by price (which is
determined by the market supply and demand).
– In the long run, firms can enter the market if profits are being made or
leave the market if profits are not being made. This continues until the LR
equilibrium is reached (price equals minimum LRAC). Price and output are
determined by the long run costs of production.
Implications
• In Perfect Competition: no firm can control or influence price –
- thus, consumer demands are satisfied by the production of the
optimum amount of goods and services; and
- in turn, resources are optimally allocated to the production of the
goods and services; and
- consumer utility is maximized and firm's economic profits are
maximized (but, zero in the long run) and
- overall, society's welfare is maximized.
- This is Adam’s Smith “Invisible Hand” postulated in 1776!
- This is usually used as a standard but is rarely achieved.
Adam Smith
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Adam Smith (baptised 16 June 1723 – 17 July
1790) was a Scottish moral philosopher and a
pioneer of political economy. Smith is the
author of An Inquiry into the Nature and Causes
of the Wealth of Nations. The latter, usually
abbreviated as The Wealth of Nations, is
considered the first modern work of economics.
Adam Smith is widely cited as the father of
modern economics.
In economics, the invisible hand the term
economists use to describe the self-regulating
nature of the marketplace, is a metaphor first
coined by the economist Adam Smith. The
invisible hand was created by the conjunction of
the forces of self-interest, competition, and
supply and demand, which he noted as being
capable of allocating resources in society. This is
the founding justification for the laissez-faire
economic philosophy.
Source for text and image: Wikipedia
Imperfect Competition
• Imperfect competition exists when an individual firm has some control over the
price of the product it sells. Then, society's welfare is not maximized.
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Profit Maximizing in a Monopoly
– In a pure monopoly, there is one producer, no other firms to enter the market,
and a differentiated product.
– To maximize profit, a firm faces the market demand curve. MR is declining. MR
and MC are equated, but the price charged is greater than MR = MC.
– This is the loss, the inefficiency, to society – the firm is paid more that the cost of
the resources used – excess profit. There are no competing firms to enter the
market to reduce the excess profits
Most Extreme Case: Monopoly
No other firms can enter
the market to capture profits.
Summary
• Markets are the links between buyers and sellers in our economic system.
• They coordinate the transformation of scarce resources into products and
services that satisfy wants.
• Market structure has implications for the efficient use of resources in
society.
• Market structure can vary from perfect competition (
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to monopoly (
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• Lecture Sources: Text and Miscellaneous Materials
Markets and Market Equilibrium
• Summary
– The concept of supply is used to model and measure producer
behavior in our economic system
– Typical production costs and are the basis for the supply curve.
• Lecture Sources: Text and Miscellaneous Materials