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Lecture Managerial economics - Chapter 2: Markets

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Lecture Managerial economics - Chapter 2 introduce markets. This chapter provides to students: Buyers, sellers, goods, and information; demand; market equilibrium; law of one price;... Inviting you to refer.

Managerial Economics Week 2: Markets 1-1 Buyers, Sellers, Goods, and Information  How prices convey information  How markets operate –where information is obtained and purchases and sales are transacted  Markets reduce the transactions costs of making exchanges 1-2 Examples of Markets    Markets are where people make comparisons Buyers and sellers interact with the goal of an exchange taking place Some markets have strict protocols (auction); others less so 1-3 Demand      Demand always a time dimension; hours, days, weeks Demand concerns the consumption side of the market A demand curve identifies the maximum amount consumers are willing to pay for any given amount of a good The difference between the amount consumers are willing to pay and the amount they have to pay is called consumer surplus Changes in non-price factors shift demand curve 1-4 Market Equilibrium  When a market comes to rest and there are no additional mutually acceptable trades to be made, we say the market has reached an equilibrium 1-5 Law of One Price Arbitrage–trading to take advantage of price difference Arbitrage brings a single price to a market in which prices for a good differ only by transactions costs  Speculation –taking one side of the market with the assumption that price will move in your direction  Speculators give markets liquidity  1-6 Why Equilibrium Matters –A Price Ceiling Price ceiling: a legal maximum on the price of a good or service Example: rent control  At the ceiling price we see that a shortage of the good will exist  The amount consumers wish to purchase at the ceiling price exceeds the amount sellers wish to sell  1-7 Who Benefits from a Price Ceiling?  If regulations set a ceiling on the interest rate banks could pay depositors at 4%, then depositors would only want to deposit $400 billion The rate that banks could then charge to ration the available funds would be 12% 1-8 Why Equilibrium Matters –A Price Floor Price floor: a legal minimum on the price of a good or service Example: minimum wage  At the floor price we see that a surplus will exist  The amount that sellers wish to sell at the floor price exceed the amount consumers wish to buy  1-9 The Minimum Wage Min wage laws not affect highly skilled workers They affect teen workers Studies: A 10% increase in the wage raises teen unemployment by 1-3% W unemployment S Min wage $5 $4 D 400 550 L 1-10 Elasticity of Demand Price elasticity of demand Percentage change in Qd = Percentage change in P 1-11 Elasticity & Total Revenue On the demand curve’s elastic portion a decrease in price will increase TR  Where demand is inelastic, a price decrease will decrease TR  All market sellers know what the demand curve they face “looks like”; they know the coefficient of elasticity  1-12 Information & Markets  Prices are discovered in markets  Prices are Adam Smith’s “Invisible Hand”  Society lacks the computing power to make all the decisions that a market makes daily to determine prices and allocate resources 1-13 The Present and the FutureSpeculators     Here is what happens both with and without speculation Consider a commodity whose peak harvest occurs in October while smaller amounts come to market in other months Without speculation, all of each month’s production is immediately sold and consumed Speculators will buy when it is abundant and hold it in expectation of gains from being able to resell it later for more money, which will reduce the price fluctuations 1-14 The Present and the FutureInformation & Revision of Prices    The market price is affected by information besides that in weather forecasts For instance, an expert on grocery markets expects that a continuing trend for lowcarbohydrate diets will decrease the economy’s demand for wheat An expert on foreign policy hears from informed sources that the government will soon initiate policies to raise wheat exports 1-15 ... information  How markets operate –where information is obtained and purchases and sales are transacted  Markets reduce the transactions costs of making exchanges 1-2 Examples of Markets    Markets. .. curve they face “looks like”; they know the coefficient of elasticity  1-1 2 Information & Markets  Prices are discovered in markets  Prices are Adam Smith’s “Invisible Hand”  Society lacks the... to pay and the amount they have to pay is called consumer surplus Changes in non-price factors shift demand curve 1-4 Market Equilibrium  When a market comes to rest and there are no additional

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