MARKET An arrangement which allows buyers and sellers to exchange money and goods. An arrangement...

of 54/54
MARKET MARKET An arrangement which An arrangement which allows buyers and allows buyers and sellers to exchange sellers to exchange money and goods. money and goods.
  • date post

    29-Dec-2015
  • Category

    Documents

  • view

    217
  • download

    2

Embed Size (px)

Transcript of MARKET An arrangement which allows buyers and sellers to exchange money and goods. An arrangement...

  • MARKET An arrangement which allows buyers and sellers to exchange money and goods.

  • WHY DO MARKETS EXIST ?We are not self-sufficient: (We specialize in what we do best.)We trade what we make for goods or services we need, or for money to buy goods and services we need.Markets facilitate specialization and exchange.

  • TWO TYPES OF MARKETSINPUT (FACTOR) MARKETS -- Firms pay resource owners (i.e., owners of labor, raw material, land, machinery and buildings) --households-- for the right to use their resources;firm -- Resource-owner interactionOUTPUT (PRODUCT) MARKETS -- Consumers --households-- pay firms for consumer goods;consumer -- firm interaction

  • Two of Economys Primary ParticipantsFIRMSHOUSEHOLDS

  • CIRCULAR FLOW OF AN ECONOMYFIRMSHOUSEHOLDSPRODUCT MARKETFACTOR MARKETProducts SuppliedProducts demandedInputsSuppliedInputs forProductionRevenue fromSelling ProductsPayment forProductsFactorCostsFactorPayments

  • What Do Firms Do ?Buy factors of production from households;Transform factors of production into finished products and services;Sell finished products and services to households.

  • Firms Buy Factors of ProductionLABOR MARKET -- Hire workers and pay wages and salaries in exchange for work.CAPITAL MARKET -- Households use savings to provide funds that firms use to buy machines, buildings and equipment.NATURAL RESOURCES MARKET -- Households sell land, minerals, oil, etc.... to firms for use in production.

  • TYPES OF FIRMSSole Proprietorship owned by one individual; individual earns all profits, responsible for all debts; 70% of all U.S. firms; 6% of total U.S. sales by firms.Partnership owned by more than one individual; division of responsibilities and profits; each individual fully responsible for all firms debts; 8% of all U.S. firms; 4% of total U.S. sales by firms.Corporation legal entity owned by stockholders (i.e., many owners); owners liability for firms debt limited to value of stock; about 20% of all U.S. firms; 90% of all U.S. sales by firms.

  • CorporationCountryRelative SizeGeneral MotorsUSA1Ford MotorUSA2ExxonUSA3Royal Dutch ShellThe Netherlands4 ToyotaJapan5HitachiJapan6IBMUSA7MatsushitaJapan8General ElectricUSA9Daimler-BenzGermany10 MobilUSA11Nissan MotorJapan12British PetroleumUnited Kingdom13SamsungSouth Korea14Phillip MorrisUSA15IRIItaly16SiemansGermany17VolkswagonGermany18ChryslerUSA19ToshibaJapan20

  • CURRENCY MARKETS AND EXCHANGE RATESForeign Exchange Market -- Entity which provides for the exchange of one currency for another;Exchange Rate -- Rate at which one currency can be exchanged for another.

  • SUPPLY AND DEMAND Market interaction;Represents buyers and sellers in a particular market;Predicts equilibrium price and quantity in a particular market.

  • MARKET DEMAND How much of a particular product consumers are willing to buy during a particular time period.

  • MARKET DEMANDHow much a Consumer Demands of a Product depends on:Price of the product being demanded;Consumer income;Price of related goods;The number of potential consumers (population);Consumer taste and advertising;Consumer expectations about future prices.

  • THE DEMAND CURVEShows how consumers exchange money for goods and services;Shows relationship between price of a good and quantity consumers willing to buy during a specific time period;Total amount demanded of a product is the sum of all consumers demand.

  • THE LAW OF DEMAND The lower the price, the larger the quantity demanded.

  • TWO DEMAND EFFECTS1.Substitution Effect: The demand for one good normally purchased will increase if its price relative to the price of another good(s) decreases: more of the original good may be substituted at its new price. APPLESBANANASOriginal Price $2/pound$0.50/poundsacrifice4 pounds bananas 1/4pound applesNew Price $0.50/pound$0.50/poundsacrifice1 pound bananas 1 pound apples

  • TWO DEMAND EFFECTS2.Income Effect - A lower price for a product means that a given amount of money will buy more of all goods.Given: $5/week fruit budget; 1pound of apples/week; APPLES OTHER FRUITOriginal Price$2/pound-------Original spending $2 $3New Price$0.50/pound------New spending$0.50$3$1.50 remains for purchase of any desired product.Price drop increases real income.

  • Change in Quantity DemandedA change in the quantity resulting from a change in the price of a good;Illustrated by movement along a demand curve.

  • Price per Pound of ApplesThousands of Pounds of Apples per day $$$1420263238$0.20$0.40$0.60$0.80$1.00DEMANDPrice / Pound$$$Quantity Demanded(Pounds / Day)$0.80 14,000$0.6020,000$0.4026,000$0.2032,000DEMANDSCHEDULEDEMANDCURVE

  • What Causes the Demand Curve to Shift(Change in Demand) A demand curve shifts as the relationship between product price and the quantity of the good demanded changes.

  • Demand Shift CausesChange in income: --Normal Good: An increase in income increases demand, shifting demand curve right; --Inferior Good: A decrease in income increases demand, shifting demand curve right;

  • Price per Pound of ApplesThousands of Pounds of Apples per day $$$1420263238$0.20$0.40$0.60$0.80$1.00DEMANDRightward Shift

  • Demand Shift CausesChange in income: --Normal Good: A decrease in income decreases demand, shifting demand curve left; --Inferior Good: An increase in income decreases demand, shifting demand curve left;

  • Price per Pound of ApplesThousands of Pounds of Apples per day $$$1420263238$0.20$0.40$0.60$0.80$1.00DEMANDLeftward Shift

  • Demand Shift CausesChange In Price of Related Good: -- Substitute Good: As price of one good increases, demand for other good increases; -- Complement Good: As price of one good decreases, demand for other good increases.

  • Price per Pound of ApplesThousands of Pounds of Apples per day $$$1420263238$0.20$0.40$0.60$0.80$1.00DEMANDRightward Shift

  • Demand Shift CausesChange In Price of Related Good: -- Substitute Good: As price of one good decreases, demand for other good decreases; -- Complement Good: As price of one good increases, demand for other good decreases.

  • Price per Pound of ApplesThousands of Pounds of Apples per day $$$1420263238$0.20$0.40$0.60$0.80$1.00DEMANDLeftward Shift

  • Other Factors Affecting Demand (Shift)Population - An increase in population means more buyers, an increasing demand, and a rightward shift in the demand curve;Consumer Tastes and Advertising - As advertising leads to greater consumer preference for a product, a rightward shift in demand occurs;Consumer Expectations of Future Prices - If consumers expect future prices for a product to be higher in the future, they will demand more of the product now.

  • Individual Demand Curve Shows the relationship between the price of a good and the quantity that a single consumer is willing to buy (quantity demanded) during a particular time period.

  • The result of a rational choice by the consumer, based on the associated benefits and costs of consuming a good.Individual Demand Curve

  • Individual Demand CurveGiven a Budget ($30);Spend all budget on two goods: Hamburgers and tacos;Consumption of Hamburgers depends on: price of burgers;price of tacos;income;underlying tastes or preferences

  • How Many Burgers Does Bob Buy ?at $3 ?8at $2 ?11$38$211bcBurgers per MonthPriceofBurgersDemand Curve

  • The Principle of Opportunity CostThe Opportunity Cost:Of something is what you sacrifice to get it;Of hamburgers is number of tacos given up to get one hamburger.Of 1 hamburger is 3 tacos, if hamburgers cost $3 and tacos cost $1. Consumption of the first through eighth hamburger provides greater pleasure than consumption of the first taco.

  • Substitution Effect Change in consumption resulting from change in price of one good relative to the prices of other goods. If price of hamburgers decreases ($2), while price of tacos remains constant, more hamburgers will be substituted for tacos. (Opportunity cost of hamburgers, in terms of tacos decreases).

  • Income Effect Change in consumption resulting from an increase in consumers real income. Real income is measured in terms of the goods the money can buy.

  • Income EffectAt the original price ($3), Bob buys 8 burgers (cost = $24) and 6 tacos (cost = $6), for total cost of $30. If the price of burgers drops, Bobs purchasing power increases.Given lower price, Bob can buy more burgers and tacos.Since Bobs $30 can buy more burgers and tacos when the price of burgers decreases, Bobs real income increases.

  • Income EffectNormal Goods - Most goods: New clothing, air transportation, and meats are examples. Consumption of normal goods increases as real consumer income increases.

  • Income EffectInferior Goods - Consumption of inferior goods decreases as real consumer income increases. Examples: Used clothing, potatoes, inter-city bus transportation.

  • The Market Demand CurveShows for each price, the quantity of a particular good demanded by all consumers.It is the sum of quantities demanded by each consumer at a given price.

  • The Market DemandPrice ofBurgersBurgers per Month$0.50$1.00$1.50$2.00$2.50$3.00$3.50481216202428Bobs DemandAnns DemandTotal Consumer (Market) [email protected] $3 market demand = 16Bobs 4 + Anns [email protected] 50 market demand = 28 Bobs 8 + Anns 20

  • Market Demand AssumptionsAll, except price of the good itself, are held constant: Price of other goods, Income, Tastes, Number of consumers.

  • UTILITY The benefit generated by consuming a good: the satisfaction or pleasure the consumer experiences when he or she consumes the good.

  • Marginal Utility The change in utility resulting from one additional unit of a good.

  • The Law of Diminishing Marginal Utility As consumption of a particular good increases, marginal utility decreases.

  • TotalUtility( TU )UTILSMarginalUtility( MU )UTILS204060801001201401601805235467812345678Burgers / MonthBurgers / MonthBurgersMUTU1101520253012626224503227242092518110616126714140812152

  • The Marginal Principle Increase the level of an activity if its marginal benefit exceeds its marginal cost, but reduce the level if the marginal cost exceeds the marginal benefit. If possible, pick the level at which the marginal benefit equals marginal cost.

  • MARGINAL UTILITY&MARGINAL PRINCIPLENumber of burgersMarginal utilityburgers ( utils )Numberof TacosMarginal utilitytacos ( utils )Marginal CostBurgersGiven: $30 budget; taco price = $1; burger price = $3;5181513

    6161226

    714939

    8126412

    9103515

    1080618

  • MARGINAL UTILITY&MARGINAL PRINCIPLENumber of burgersMarginal utilityburgers ( utils )Numberof TacosMarginal utilitytacos ( utils )Marginal CostBurgersGiven: $30 budget; taco price = $1; burger price = $3;5181513

    6161226

    714939

    8126412

    9103515

    1080618

  • The Utility Maximizing Rule A consumer will maximize his/her utility by picking the affordable combination of consumer goods that makes the marginal utility per dollar spent on one good equal to that of a second good.

  • The Utility Maximizing RuleMarginal Utility of burgersMarginal Utilityof Tacos=Price ofburgersPrice of Tacos

  • CONSUMER SURPLUS The difference between the maximum amount that a consumer is willing to pay for a good or service and the price he or she pays for the product.

  • Demand Curve and Consumer SurplusIf Oscars demand for CDs is such that at: Price Quantity Oscar Will Buy $240 $211 $182 $153 $124 $95

  • CONSUMER SURPLUS FOR AN INDIVIDUAL CONSUMER1012 14161820222412 3 45 $11$8$5$2PRICEOFCDs($)NUMBER OF CDs PER MONTHIndividual DemandCurvePrice = $10t u v w x y CDsWilling toConsumerPaySurplus1$21$112$18$83$15$54$12$2 Total$26