Microeconomics Notes on Markets and Prices

What Is a Market?

  • Definition of a Market: A collection of buyers and sellers that, through their actual or potential interactions, determines the price of a product or set of products.

    • Market definition: Involves determining the buyers, sellers, and range of products that should be included in a particular market.

  • Arbitrage: The practice of buying at a low price in one location and selling at a higher price in another location.

Competitive versus Noncompetitive Markets
  • Perfectly Competitive Market: A market with many buyers and sellers where no single buyer or seller can significantly impact the price.
  • Noncompetitive Market: Markets that contain many producers but where individual firms can affect the price due to less competition.
Market Price
  • Market Price: Price prevailing in a competitive market.
    • In non-competitive markets, prices may vary between firms for the same product.
    • Prices fluctuate over time, particularly in competitive markets.
Extent of a Market
  • Extent of a Market: The boundaries of a market, both geographically and in terms of product range.
    • Narrow geographic boundaries may be relevant for certain products.
    • Understanding market definition is essential for identifying competitors and informing public policy.
Example: Bicycle Markets
  • Mass Market Bicycles: Sold by stores like Target and Wal-Mart.
    • Example prices: Huffy: $90-$140, Schwinn: $140-$240.
  • Dealer Bicycles: Sold by specialized bicycle dealers.
    • Example prices: Trek: $400-$2500, Cannondale: $500-$2000.

Real versus Nominal Prices

  • Nominal Price: The absolute price of a good, not adjusted for inflation.
  • Real Price: Price adjusted for inflation; reflects the good's price relative to an aggregate measure of prices.
Price Measurements
  • Consumer Price Index (CPI): Measures the aggregate price level.
  • Producer Price Index (PPI): Measures the aggregate price level for intermediate products and wholesale goods.
Example: Butter Prices Over Time
  1. Nominal Prices:
    • 1970: $0.87, 1980: $1.88, 1990: $1.99, 2015: $3.48
  2. CPI Calculation: CPI in 1970 = 38.8, CPI in 2015 = 237.0.
  3. Butter Price in 1970 Dollars:
    • Real price = racCPI<em>2015CPI</em>1970imesextnominalprice2015rac{CPI<em>{2015}}{CPI</em>{1970}} imes ext{nominal price}_{2015}
    • Real price varies with inflation adjustments.
Price of Eggs and College Education
  • To calculate real prices in terms of previous years (1970, 1980, etc.), adjust nominal prices by CPI.
  • Example formula for real price:
    • ext{Real Price} = rac{CPI{current}}{CPI{base}} imes ext{nominal price}_{base}
Percentage Change in Real Prices
  • To calculate the percentage change in real price:
    • ext{Percentage change} = rac{ ext{Real price}{end} - ext{Real price}{start}}{ ext{Real price}_{start}}
    • Can assess how prices behave over decades, like eggs and education costs.

Conclusion: The Importance of Real Prices

  • The real minimum wage is what impacts consumers, with nominal increases not necessarily reflecting true purchasing power due to inflation.