Understanding-Market-Transactions.pdf

Understanding Market Transactions A market is a place where buyers and sellers come together to exchange goods and services. This chapter explores the fundamental concepts of supply and demand, and how they interact to determine the equilibrium price and quantity in a market. Factors Influencing th...

Understanding Market Transactions A market is a place where buyers and sellers come together to exchange goods and services. This chapter explores the fundamental concepts of supply and demand, and how they interact to determine the equilibrium price and quantity in a market. Factors Influencing the Demand 1 Price 2 Buyer's Income 3 Buyer's Wealth The price of the good is the A buyer's available income A buyer's accumulated assets primary driver of quantity and wealth affect their can influence their spending demanded. purchasing power. habits. 4 Expectations of future 5 Prices of alternative 6 Personal Tastes price changes items A buyer's personal Buyers' expectations about The prices of alternative goods preferences and fashions future prices can impact their can sway demand for a affect what they choose to current demand. product. purchase. 7 Market Population The size and demographics of the target market influence overall demand. Demand Law of Demand Demand Curve Shifts in Demand The law of demand states that, all The demand curve graphically Changes in factors other than price, else being equal, the lower the represents the relationship such as income, wealth, or the price of a good, the greater the between price and quantity prices of related goods, can cause quantity demanded. demanded. It is typically a shift in the entire demand curve, downward-sloping, reflecting the rather than just a movement along Thus when the price of a good law of demand. it. decreases, it becomes more affordable for consumers, and they are willing to purchase more of it, vice versa. What Impacts Supply? 1 Price of the Good 2 Input Costs The selling price is the primary driver of quantity The prices of materials, labor, and technology supplied. affect production expenses. 3 Production Technology 4 Opportunity Costs Advances in equipment and methods impact The ability to produce other goods with the same supply levels. resources influences supply. 5 Future Price Expectations 6 Number of Sellers Beliefs about future prices can drive current supply The quantity supplied depends on how many decisions. producers are in the market. Supply Law of Supply Supply Curve The law of supply states that, all else being equal, the The supply curve graphically represents the relationship higher the price of a good, the greater the quantity between price and quantity supplied. It is typically supplied. Conversely, the lower the price, the lower the upward-sloping, reflecting the law of supply. quantity supplied. Shifts in Supply When the price of a good increases, it becomes more Changes in factors other than price, such as input prices, profitable for producers to supply that good to the technology, or the number of sellers, can cause a shift in market. This incentivizes them to increase their the entire supply curve, rather than just a movement production and bring more of the good to market, vice along it. versa. Market Equilibrium Shortage 1 When the quantity demanded exceeds the quantity supplied, a shortage occurs, leading to upward pressure on price. 2 Equilibrium Market equilibrium is reached when the quantity demanded is equal to the quantity supplied, and the price adjusts to balance the Surplus 3 market. When the quantity supplied exceeds the quantity demanded, a surplus occurs, leading to downward pressure on price. Changes in Demand and Supply Demand Changes Supply Changes A change in demand, caused by factors such as A change in supply, caused by factors such as input income, wealth, or the prices of related goods, leads prices, technology, or the number of sellers, leads to to a shift in the demand curve and a new equilibrium a shift in the supply curve and a new equilibrium price price and quantity. and quantity. Inferior and Normal Goods Inferior Goods Normal Goods Inferior goods are those whose demand decreases as Normal goods are those whose demand increases as income increases. Consumers may purchase more income increases. Consumers may purchase more affordable goods when their income rises, such as expensive goods when their income rises, such as switching from a used car to a new car. upgrading from a mid-range car to a luxury car. Substitutes and Complements Substitutes Complements Substitutes are goods that can be used in place of one Complements are goods that are used together, such as another, such as different brands of cars or different a car and its fuel, where a change in the price of one modes of transportation. affects the demand for the other. The Role of Expectations Future Prices 1 Buyers' and sellers' expectations about future prices can influence their current demand and supply decisions. Future Events 2 Expectations about other future events, such as changes in income, wealth, or technology, can also affect current market behavior. Feedback Loop 3 The interaction between expectations and market outcomes creates a feedback loop that can influence the equilibrium price and quantity over time.