Prices and Markets

Ch a p t e r fo u r

Meaning of price and value
  

Value is exchange Prices are monitory measures of exchange value

Types of markets
 

Old and new market Local, national and international markets

Demand

A desire for a good which is backed up by willingness and ability to pay the price of that good. Demand is defined as quantity demanded at any given price over some given period of time

Law of demand
   

There is inverse relationship between price and quantity demanded. Other things constant places a limitation on the application of the law of demand. When price increases the quantity demand decreases When price decreases the quantity demand decreases

Demand vs. Quantity Demanded

Demand is the amount of a product that people are willing and able to purchase at each possible price during a given period of time. The quantity demand is the amount of a product that people are willing and able to purchase at one, specific price.

Shape of demand curve
  

Pric e (p e r u n it )

The demand curve slopes downward and to the right Income effect Related goods effect
A

0

D

Qu a n t it y d e m a n d e d (p e r u n it o f t im e )

Supply

 

Quantity of a commodity which is supplied at an given price over some given period of time. More will be supplied at higher prices than lower prices.

Law of supply
   

There is negative relationship between price and quantity supplied. When holding other things constant When price increases the quantity supplied also increase When price decreases then quantity supplied also decreases

Shape of supply curve
 

Firms try to earn maximum profits

Price (per unit)

S A

PA

0

QA Quantity supplied (per unit of time)

Market price

When demand and supply intersect at one price called equilibrium price and quantity is called equilibrium quantity.

Demand and Supply
$5.00 4.00 Excess supply A E C Excess demand 1 2 3 4 5 6 7 3.50 3.00 2.50 2.00 1.50 1.00

S

Price per DVD

D
8 9 10 11 12

Quantity of DVDs supplied and demanded

 

Excess supply: when quantity supply is greater than quantity demanded (surplus) Excess demand: when quantity demand is greater than quantity supplied (shortage)

Changes in Demand
 

Movement along the demand curve Movement of demand curve

Movement along the curve

Pric e (p e r u n it )

$2

B Ch a n g e in q u a n t it y d e m a n d e d (a m o ve m e n t a lo n g t h e c u rve )

$1

A

D1
0 100 200 Qu a n t it y d e m a n d e d (p e r u n it o f t im e )

Movement of demand curve (shift in demand)

Price (per unit)

$2

Change in demand (a shift of the curve)

$1

B

A D0 D1

250 100 200 Quantity demanded (per unit of time)

Causes of movement of demand curve( determinants of demand)
1.Changes in income 2.Changes in the prices of other goods
1.Substitutes 2.Complements

3.Changes in taste and fashion 4.Advertising 5.Hire purchase

Increase or decrease in demand
 

When demand curve shift towards left it is decreasing When demand curve shift towards right it is increasing

Changes in supply
 

Movement along the curve Movement of the supply curve

Movement along the curve
S0

Pric e (p e r u n it )

B A Ch a n g e in q u a n t it y s u p p lie d (a m o ve m e n t a lo n g t h e c u rve )

$15

1,250 1,500 Qu a n t it y s u p p lie d (p e r u n it o f t im e )

Movement of supply curve
S0 S1

Pric e (p e r u n it )

$15

A

B Shift in Supply (a shift of the curve)

1,250 1,500 Qu a n t it y s u p p lie d (p e r u n it o f t im e )

Effects of changes in supply curve
 

When supply increases it shifts towards rightward When supply decreases it shifts towards leftward

Demand and supply: some important relationships

  

Competitive demand_ goods which are substitutes for one another are said to be in competitive demand. Joint demand_ when use of one good requires use of another good Joint supply_ production of one good creates supply of another good Demand of one good is joint with supply another good

Demand and supply some real example

Non-market prices
  

Holding down food prices during emergency Offering farmers a guaranteed price higher than the free market price. A fixed supply _ cup final tickets

  

Taxes and subsidies
 

Effect of placing a tax on a commodity The effect of a subsidy