Lecture on Market Dynamics: Prices, Demand, and Supply

Key Concepts

• Market Pricing: Determined by the intersection of demand and supply.
  • Demand: Optimized by consumers within their constraints.
  • Supply: Optimized by producers based on costs.
• Equilibrium Price: The price point where demand and supply meet.
  • Consumer Competition: Drives prices up to equilibrium when too low.
  • Producer Competition: Drives prices down to equilibrium when too high.
  • Arbitrage: Ensures the equilibrium price prevails across the market.

Changes in Prices

• Shifting Demand:
  • Increase in Demand:
    • Higher consumer incomes increase demand for normal goods.
    • Increase if the price of a substitute rises or a complement drops.
    • Positive consumer preferences or reduced purchase uncertainty boost demand.
    • Adding more consumers to the market increases demand.
  • Decrease in Demand:
    • Lower incomes increase demand for inferior goods.
    • Reversal of any positive demand factors.

Impact on Equilibrium Price

• Scenario: Prime Beef Market

  • Prime Beef is a normal good.
  • Rising incomes in the developing world increase demand.
  • Demand shifts right: At old price, market is out of equilibrium.
  • Consumers bid price up; equilibrium quantity and price rise.
  • Law of Demand: Not violated as willingness to pay increases.
  • Law of Supply: More production encouraged by higher prices.

• Scenario: Select Beef Market

  • Select Beef is considered an inferior good.
  • Rising incomes lead to decreased demand.
  • Demand shifts left: Equilibrium price and quantity decrease.

Demand Flowchart Summary

• Price Changes Due to Demand:
  • Decrease in Demand:
    • Consumers willing to pay less; buy less at each price.
    • Seller competition lowers prices; reduces quantity produced.
    • Result: Lower equilibrium price and quantity.
  • Increase in Demand:
    • Consumers willing to pay more; competition increases.
    • Leads to higher prices and production.
    • Result: Higher equilibrium price and quantity.

Reflection

• Consider recent price changes in products you buy.
  • Analyze if changes were due to shifts in demand.
  • Assess if consumer willingness to pay influenced the change.