Chapter 3: Markets and prices

What is a market?
What is the price mechanism?

There are a lot of selling points.  So the consumer must make a choice in which place he wants to buy.  But the seller also has to choose a place where he want to set up his company.

Exercises

1) Where do you buy the following goods?

2) Mention 2 reasons why you want to buy in the following selling points:

3) You want to open a petrol station.  Where do you want to place it?

4) What are the factors influencing the choice of a location?

1. The market is more than one place

A bakery is a selling point.  The baker offers bread.  The client who is coming into the bakery want to buy bread, he has a demand.

There are lot of bakers and many clients, thus there is a lot of supply of and demand for bread.  All suppliers and demanders together form the bread market.

Below follow 5 markets.  What is the trade?  Give for each market an example of a demander and supplier.

Market Product Supplier Demander
Auto market      
Petroleum market      
Insurance market      
Travel market      
Animal market      

All markets together form the product market.

As there is a demand and supply of products and services, there is also a demand and supply of labor.  This happens on the labor market.

Markets can also be described according to the society in which they are working: e.g. competition and monopoly.

1.2 Competition

Perfect competition occurs in a market in which:

1.3 Monopoly

A monopoly is an industry in which there is one supplier of a good, service or resource that has no close substitutes and in which there is a barrier preventing the entry of new firms.

Exercises

1) Give some barriers to entry.

1.4 Varieties of market structure

Characteristics Perfect
competition
Monopolistic
competition
Oligopoly Monopoly
Number of firms in the industry many many few one
Product identical differential identical or differential no close substitutes
Barriers to entry none some scale and scope economies scale and scope economics or legal barriers
Firms' control over price none some considerable considerable or regulatory
Concentration ratio (0 to 100) 0 low high 100
Examples wheat food auto electric utilities

2. Buying and selling ... but not at any price

2.1 You are not alone to make your price

The price for which you can sell is the market price.  That means that for that price there is somebody who wants to buy.

The following situation is the market situation for azalea's:

Price per plant Quantity demand Quantity offer
4 80 20
6 60 30
8 40 40
10 10 60
12 0 90

Exercises

1) Make the supply and demand curve:

2) What are the market price and the handled quantity?

The price mechanism

The price of a good regulates the quantities demanded and supplied.  

Equilibrium is the situation in which opposing forces balance each other and in which no one is able to make a better choice given the available resources and actions of others.  

The equilibrium price is the price at which the quantity demanded equals the quantity supplied.

The equilibrium quantity is the quantity bought and sold at the equilibrium price.

Price (EURO / tape) Qty demanded
(millions of tapes / week)
Qty supplied
(millions of tapes / week)
Shortage or surplus
(millions of tapes / week)
1 9 0 -9
2 6 3 -3
3 4 4 0
4 3 5 2
5 2 6 4

Exercises

1) Explain why the market for azalea's is in equilibrium?

2) The demand and supply schedules for gum are as follows:

Price (cents / pack) Qty demanded
(millions of packs / week)
Qty supplied
(millions of packs / week)
10 200 0
20 180 30
30 160 60
40 140 90
50 120 120
60 100 140
70 80 160
80 60 180
90 40 200

2.2 The market price changes

The market price is influenced by supply and demand.

The demand can change under influence of:

The supply can change un influence of:

What happens to demand if demand increases?

Example:

If the price of a walkman falls from 200 EURO to 50 EURO, the demand for tapes will increase as shown in the table and chart below.  The original demand schedule and the new one are set out in the first three columns of the table.

    Demand
(millions of tapes / week)
Supply
(millions of tapes / week)
    walkman 200 EURO walkman 50 EURO  
  Price
(EURO / tape)
Qty demanded
(millions of tapes / week)
Qty demanded 
(millions of tapes / week)
quantity supplied
a 1 9 13 0
b 2 6 10 3
c 3 4 8 4
d 4 3 7 5
e 5 2 6 6

The original equilibrium price was 3 EURO.  At that price, 4 million tapes a week were demanded and supplied.  When demand increases, the price that makes the quantity demanded equal to the quantity supplied is 5 EURO per tape.

At this price, 6 million tapes are bought and sold each week.  When demand increases, both the price and the quantity supplied increase.

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