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Prices and Markets
AG BM 102
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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
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Market – the context of transactions between buyers
and sellers of the same good or service
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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, the level of the marketing system
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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
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An Example – Beef Demand
Price/lb. Quantitylb./cap.
Price/lb. Quantitylb./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 $2.75 95
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An Example – Beef Supply
Price Quantity Price Quantity
3.00 60 4.25 72.5
3.25 62.5 4.50 75
3.50 65 4.75 77.5
3.75 67.5 5.00 80
4.00 70 5.25 82.5
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Q P 150 20
Q P 30 10
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Q P 150 20Q P 30 10
150 20 30 10 P P
120 30 P
P and Q 4 70
Demand
Supply
Demand = Supply
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Why is it stable?
• If P is too low, quantity demanded exceeds quantity supplied and price is bid up
• If P is too high, quantity supplied exceeds quantity demanded and price falls
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100
5
10
15
20
25$/
cwt.
Class IIIavg
Class III Milk Price
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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
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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
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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
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Efficient Markets
• Present price incorporates all known information
• Who will sell you 100 shares Coca Cola when you want to buy?
• Winner’s Curse
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Winner’s Curse
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Concluding Comments
• Market defines price and quantity• Sends message to everyone about
conditions• Regulates decisions• Becomes interesting when a line moves