Achievement Standard 1.4 The Market

Describing the Market (and all non – market) processesExplanation of factors that affect Market equilibrium

Topics

• The Market & Price

• Competition, Money & the Law

• Government Intervention

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Market & Price

What is a Market?“A market is a place or situation wherebuyers and sellers transact business. Amarket exists whenever there is buying andSelling”

Diversity of MarketsThere are markets for: • Goods & Services• Resources• Borrowed Money• Foreign Exchange• Exports and Imports

Non Market Ways to Satisfy Wants

• Produce your own• Voluntary Organisations• Free (or Subsidised) Government Services• Communes• Family/Whanau

Test your knowledge.What are examples of these non market ways to satisfy wants?

Clue Clue Clue

Market Equilibrium

There are two “sides” to a Market:• The BuyersRemember the law of Demand.

As price increases the quantity demanded will decrease and as

price decreases the quantity demanded will decrease

• And the SellersRemember the law of supply

As price increases the quantity supplied will increase and as the price

decreases the quantity supplied will decrease

Is there a middle ground……..?

Market Equilibrium in Action

Supply and Demand for Pies per day

Price ($) (per Pie)

Quantity Demanded

5.00

4.00

3.00

2.00

1.00

1

3

7

9

14

Price ($) (per Pie)

Quantity Supplied

5.00

4.00

3.00

2.00

1.00

15

9

7

3

1

Can the two sides agree? In a market the two sides come together there is one price where both sides will agree. In this example what is the Price and Quantity that the two sides can agree on?

Answer: Price = $3.00 and the Quantity = 7

Market Price & Equilibrium Price

• Market Price is the price the market is currently charging

• Equilibrium Price is the price where everything supplied will be brought there is no excess demand or supply.

The Market for Pies

S

D

Quantity 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Qe

Price ($) 5.00

4.00

3.00

2.00

1.00

Pe

What is Market

Demand?How is it

calculated? What is

Market Supply?How is it

calculated?

When the Market Price does not equal the Equilibrium Price.

Excess Demand For excess demand (ie a shortage) to occur, the market price must be

below equilibrium.

S

D

Qs Qd Quantity Excess demand

Price

Pe

P

Market for All Black Jerseys

When the Market Price does not equal

the Equilibrium Price. Implications - Excess Supply For excess supply (ie. a surplus) to occur, the market price must be

above equilibrium.

S

D

Qd Qs Quantity

Excess Supply

Price

P

Pe

Market for Lions Jerseys

Functions of Price

• Price rations out scare resources and output.

• Price acts as a signal to producers as to what is wanted by

Consumers and what is not.

The World PriceThere is more than just the domestic market available to New Zealand

Producers. The world price will affect what is imported and what is

exportedWorld Price above NZ Price World Price below NZ

Price

D

S

World Price

Price

Pw

Pe

Price

Pe

Pw

Qs Qe Qd Quantity

Made in NZ

Brought in NZ

Exported

Qd Qe Qs Quantity

Sold in NZ

S

D

World PriceImported

Competition, Money & Law

Competition is when there is another producer in the same

market, producing an identical or very similar good or service.

There are two types of competition Producers use. Price & Non-Price

Price CompetitionBeating the competition by offering a lower price. Following the law of

demand. As P ↓ QD will ↑. Producers will hope for increased sales

hopefully at the expense of a competitor. Producers will need to take

care that sales increase by enough to cover any increased costs.

This type of competition can lead to price wars. P

P1

P2

Q1 Q2 Q

DCan you think of some recent examples of price competition?

Competition Continued

Non Price Competition involves persuading the buyer through ways other than

lowering price.

The Aim is to move the whole Demand

Curve.

An increase in Demand.

The Price does not change

but demand moves from D to D.

Quantity from Q to Q1

D1D

P

P

Q Q1 Q

Can you think of examples of non price competition in the market today?

Clue!

Types of Non Price Competition

Packaging

Competitions, Games &

Prizes

Sponsorship

Product Differentiation

Product Variation

Improving Service

Added Extras

Advertising

Non Price Competition

MoneyWhen any goods or services, factors of production or foreign

exchange are exchanged, the trade will normally involve Money.

Without money the only other means of exchange is by Barter.

• Barter is the exchange of goods and services for goods and services

• Money is anything that most people will accept in exchange for goods and services, with the knowledge that others will accept it from them.

Functions of good money

A measure of value

Means to buy now/pay later

Store of value

Means of exchange

The LawLaws provide a set rules that everyone knows and should abide by, so

there is a high degree or predictability. People know what it is, and is

not, allowed when buying and selling.

Buyers•Have the right to be given •what they paid for and not •something else.•Have protection under specific•Consumer Laws.•Have the responsibility to check•Before they buy.•Have to pay for goods and •Services in full and on time.

Buyers•Have the right to be given •what they paid for and not •something else.•Have protection under specific•Consumer Laws.•Have the responsibility to check•Before they buy.•Have to pay for goods and •Services in full and on time.

Sellers•Have right to be paid.•Have the right to repossess goods•or sue customers who do not •pay (I.e. take them to court and•demand the money.), depending •on the type of transaction.•Must have the legal right to sell.•Must comply with consumer and •other laws.

Sellers•Have right to be paid.•Have the right to repossess goods•or sue customers who do not •pay (I.e. take them to court and•demand the money.), depending •on the type of transaction.•Must have the legal right to sell.•Must comply with consumer and •other laws.

Law of Contract

A contract is a legal agreement which is binding. If one side breaks acontract,the other can ask a court to enforce the contractWhat are the essential elements of a contract?

• Caveat Emptor “let the buyer beware” • Signature Your signature means you have read and agree with

everything.

Consumer Laws:• Fair Trading Act (1986)• Consumer Guarantees Act (1998)• Door to Door Sales Act (1976)• Purchase Act• Credit Contracts Act

Law of ContractA contract is an agreement between 2 or more people that is

Legally binding.

A valid contract has 7 essential requirements:

1. Intention. The contract must be serious – a legal relationship

2. Legal. The object of the contract must be legal

3. Offer and Acceptance. Must be an offer and acceptance

4. No Duress. No use of undue force

5. Contractual Capacity. parties to the contract must be of age, sane and sober. Issues arise when a person has a mental disorder, is a minor (under 18) or intoxicated/drugged. Minors can enter into certain types of contract usually with permission of guardians

6. Proper Form. A formal contract must be in writing. Contracts can be an oral agreement

7. Consideration. Something of value must be exchanged.

Government InterventionWhat happens when the equilibrium price is considered to

be too high or too low?

Governments can intervene in the market place to cause price changes

which are considered socially desirable.

HOW?Price ControlsPrice Ceiling or Maximum Price.This is a price which is below equilibrium. The market price can not

rise to equilibrium without breaking the law.The effect of a maximum price (Price Ceiling)

P

Pe

Pmax

S

DPrice Ceiling

Qs Qe Qd Q

Permanent Excess Demand

Permanent Excess Demand

can create a black market

What is a black

market?

Government Intervention Continued

Price Floor or Minimum PriceThis is a price above equilibrium. It is not possible for market price to fall

to equilibrium without breaking the law?

S

D

Price

Pmin

Pe

The effect of a minimum price (Price Floor)

Qd Qe Qs Quantity

Excess Supply

Price Floor

Past examples include NZ Wool

Other methods of Government Intervention

Direct & Indirect Taxation

Subsidies

A direct tax is paid by the tax payer to the Inland Revenue Department (IRD), e.g. Income Tax.

A indirect tax is collected from the tax payer by someone else. (A third party) who pays it to the IRD. e.g. GST

A subsidy is a negative tax which is paid to the producer by the government to encourage production and lower prices to consumers

EffectsThe effect of an increase in Indirect Tax

The effect of an increase in Direct Tax

D1D2

SPrice

($)

P1

P2

Q2 Q1 Quantity

D

S1

S2Price

($)

P2

P1

Q2 Q1 Quantity

Tax The effect of a subsidy

S1

S2

D

Price ($)

P1

P2

Q1 Q2 Quantity

Subsidy

Return to Non Price

Competition

Market for Goods and Services

The market for goods and services is a final market, where buyers are consumers who buy goods and services to satisfy their needs and wants.

Market for Resources

The market for goods and services are the factor markets of land, labour and capital where producers buy resources to combine to make goods and services

Market for Borrowed Money

The market for borrowed money is often called the finance market. This is where producers and consumers go when they need to borrow money. When they borrow the pay the price for the use of that money. This price is interest

Market for Foreign Exchange

The market for foreign currencies where people buy and exchange currencies.

Market for Exports and Imports

The market where countries can sell their goods and services (Exports) or buy other countries goods and services (Imports). Often referred to as the External or Overseas Market. Is linked to the Foreign Exchange Market. Return to

the Market

The Fair Trading Act (1986)

Sellers must tell the truth and not deliberately mislead consumers. They must “sell it like it is”

Consumer Guarantees Act (1993)

If consumer goods are faulty, the seller must fix or repair them, replace or refund the customer their money. Not give them a credit note. Note a seller does not have to take back goods because you have changed your mind or they do not fit you.

Door to Door Sales Act (1967)

If an uninvited salesperson calls at your home and sells you goods on credit or time payment, you have a 7-day “cooling off” period, during which time you can cancel the contract. Credit $20+ Cash $40+

Hire Purchase Act

Sets out what any seller must do before they repossess goods when the purchaser has fallen behind in their payments.

Credit Contracts Act

Requires all lenders to tell people precisely what interest and other charges they will be paying for when borrowing money

Return to Law of

Contract

Market Demand

Is the total of everyone’s individual demand. It is calculated by adding horizontally all individual demand.

Price

($)

Ice Creams

Quantity Demanded

Sally Tom Jade Market

10

7

4

2

3

5

7

9

1

3

5

7

4

5

7

10

8

13

19

16

Price

($)

Ice Creams

Quantity Supplied

Dave’s Patty’s Jim’s Pam’s

10

7

4

2

10

8

6

3

12

9

8

3

9

7

5

2

31

24

14

8

Market Supply

Is the total of all producers supply. It is calculated by adding horizontally all individual supply.

P

Q

D

P

Q

S

Back to Market Price & Equilibrium

Bibliography• Williamson, M (2003). Year 11 Economics Study Guide. NCEA Level 1.

ESA Publications (NZ) Ltd. Singapore. Pp. 87 – 146

• Evans, Geoff (2002) Economics for the Market. A Year 11 Economics Course. Pearson Education, Malaysia Pp. 121 – 186

• Rennie, Dan (2000). Understanding Economics Year 11. Concepts, Definitions, Skills and Activities for Year 11 Economics. New House Publishers Ltd. Hong Kong. Pp. 192 -263

• www.moh.govt.nz

• www.redcross.org.nz

• www.wwoof.co.nz

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