Introduction to Markets and Economic Principles
Introduction to Markets
Definition of a Market:
An organizational institution where buyers and sellers interact is the key feature of a market.
Market Variations:
Markets can be online, in-person, or through various methods such as mail.
Key Processes in Markets:
The essential transaction in a market involves negotiation between buyers and sellers to establish a price.
Characteristics of Market Transactions
Voluntary Transactions:
All transactions in a market are voluntary; both buyers and sellers must agree to exchange something of value.
Exchange of Value:
A market is defined by the requirement that something of value must be given up by both parties involved.
Example: A gift does not constitute a market transaction since there is no exchange of value.
Economic Framework in Australia
Role of Markets in the Australian Economy:
Markets are the primary instrument for addressing key economic questions in Australia.
Market Transactions Examples
Transaction Scenarios:
Transaction of $30:
Indicated as a valid market transaction.
Lawn mowing:
Noted as a transaction; service is exchanged for payment.
Thank you note:
Not considered a market transaction.
Trade of pets (three cats for two goats):
Valid transaction as both parties give something of value.
Water buffaloes as a gift:
Not a transition; seen as a gift rather than market exchange.
Microeconomics: Demand and Supply
Interaction of Demand and Supply:
Microeconomic concepts focus on demand and supply interactions and their implications in competitive markets.
Assumptions about Competitive Markets:
Many buyers and sellers exist within the market.
None possess significant market power to influence prices.
Prices are determined by the dynamics of demand and supply without government intervention.
Visual product differentiation exists, allowing consumers to choose among similar products.
Low barriers to entry and exit for suppliers.
Examples of Competitive Markets
Fruit markets as a classical example of a competitive market:
Many sellers and buyers participate in transactions, similar products available.
Challenges in identifying pure competitive markets:
Many markets require significant capital investment and regulatory compliance, making them less competitive.
Presence of freelancing markets:
Suggests existence of competitive environments with many providers.
Ceteris Paribus Principle
Definition:
"Ceteris Paribus" (Latin for "all else equal") refers to holding all other variables constant while examining the effect of a single variable.
Demand Dynamics
Demand Law:
As the price of a good rises, the quantity demanded typically decreases (and vice versa).
Price on Quantity Demanded:
Demand curve reflects the inverse relationship; a higher price results in lesser quantity demanded.
A lower price increases quantity demanded.
Terms Used for Changes:
Contraction in demand—movement along the demand curve due to an increase in price.
Expansion in demand—movement along the demand curve due to a decrease in price.
Effects Influencing the Law of Demand
Income Effect:
When the price increases, fewer consumers can afford the product, reducing quantity demanded.
Substitution Effect:
Higher prices lead consumers to replace the expensive product with cheaper alternatives.
Diminishing Marginal Utility:
As people consume more of a product, each additional unit provides less satisfaction or utility.
Example:
Jim loves Star Wars but derives less satisfaction from each subsequent viewing, affecting his demand depending on ticket prices.
Illustrating Auction Processes
Auctions as a economic model:
Bidding reflects the law of demand; higher bids lead to fewer participants as prices rise.
Insights on the income effect and substitution effect evident during the bidding process as prices rise.
Supply Dynamics
Supply Law:
As the price of a good rises, the quantity supplied typically increases (and vice versa).
Motivation for Suppliers:
Higher prices motivate producers by increasing potential profits.
Factors Influencing Supply:
Profitability, resource availability, and increasing marginal costs predict willingness to supply.
Changes in Supply Dynamics:
Expansion—movement along the supply curve indicating an increase in price and supply.
Contraction—movement along the supply curve indicating a decrease in price and supply.
Opportunity Cost and Marginal Costs
Opportunity Cost:
Reflects the next best alternative foregone when choosing to supply a specific good.
Understanding how rising supply prices influence the decision between alternatives is crucial.
Marginal Costs:
Costs associated with producing one additional unit of a good; can increase due to various production factors.
Market Illustration and Multiple Choice Exercise
Example of a multiple-choice question illustrating concepts of supply and demand in relation to apples:
Option A: Advances in farming technology cause increased demand—True; relates to shifts in supply.
Option B: Increased pear prices raise apple supply—True; reflects substitutional relationships in supply.
Option C: Declined household incomes cause reduced apple supply—False; reveals complexities in demand interpretation.