Prices and Markets AG BM 102
Prices and Markets
AG BM 102
Introduction
• Prices change all the time
• The reason is because of changes in supply and/or demand
• This happens in a market
• A market is many things, but essentially it is where suppliers and demanders meet
Market – the context of transactions between buyers
and sellers of the same good or service
A Market
• Where the prices are determined
• Where the terms of trade are negotiated
• May be defined as a place, a time, a group of buyers or sellers, a level of the marketing system
Equilibrium
• Occurs where supply and demand curves meet
• Defines a price and a quantity that clears market
• Sends message to those in the market about preferences
An Example – Beef Demand
Price/lb. Quantity
lb./cap.
Price/lb. Quantity
lb./cap.
$5.00 50 $3.75 75
$4.75 55 $3.50 80
$4.50 60 $3.25 85
$4.25 65 $3.00 90
$4.00 70 $2.75 95
An Example – Beef Supply
Price Quantity Price Quantity
3.00 60 4.25 72.5
3.25 62.5 4.50 75
3.50 65 4.75 77.5
3.75 67.5 5.00 80
4.00 70 5.25 82.5
Q P 150 20
Q P 30 10
Q P 150 20Q P 30 10
150 20 30 10 P P
120 30 P
P and Q 4 70
Demand
Supply
Demand = Supply
Why is it stable?
• If P is too low, quantity demanded exceeds quantity supplied and price is bid up
• If P is too high, quantity supplied exceeds quantity demanded and price falls
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160
5
10
15
20
25$/
cwt.
Class IIIaveragefutures
Class III Milk Price
Source: USDA
Why does this happen?
• Why does a small shift in supply cause the price to change by so much?
• Demand is so inelastic!
• The only way to absorb the additional milk is to torpedo the price
What happens when a line moves?
• In this graph, the milk supply decreased
• Supply curve shifts
• New equilibrium at a higher price
• Sometimes the demand curve shifts
• Same idea – move a line, new equilibrium
• Increase in demand – higher price
• Decrease – lower price
What changed?
• If demand increases – the line moves
• It crosses supply at a new point
• An increase in demand causes an increase in QUANTITY SUPPLIED
• In general, one line moves & you move along the other line to the new equilibrium
Kinds of changes
• Input price rises
• Competing good goes on sale
• Income falls
• Health news
• New production technique
• Etc.
Efficient Markets
• Present price incorporates all known information
• Who will sell you 100 shares Coca Cola when you want to buy?
• Winner’s Curse
Winner’s Curse
Concluding Comments
• Market defines price and quantity
• Sends message to everyone about conditions
• Regulates decisions
• Becomes interesting when a line moves