Lecture Managerial economics - Chapter 2: Markets

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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.

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  1. Managerial Economics Week 2: Markets 1-1
  2. 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
  3. 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
  4. 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
  5. 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
  6. 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
  7. 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
  8. 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
  9. 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
  10. The Minimum Wage Min wage laws unemp- do not affect W loyment S highly skilled Min. $5 workers. wage They do affect $4 teen workers. Studies: A 10% increase in the min wage D raises teen L 400 550 unemployment by 1-3%. 1-10
  11. Elasticity of Demand Price elasticity Percentage change in Qd = of demand Percentage change in P 1-11
  12. 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
  13. 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
  14. The Present and the Future- Speculators  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
  15. The Present and the Future- Information & 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 low- carbohydrate 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


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