The Market Mechanism

9 Key excerpts on "The Market Mechanism"

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  eBook - ePub

  Economic Lessons from the Transition: The Basic Theory Re-examined

  The Basic Theory Re-examined

  • Daniel R. Kazmer, Michele Konrad(Authors)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  1 The Basic Market Mechanism

  The heart of The Market Mechanism is the interaction, in fact, the intersection, of supply and demand. This is the first thing that all economics students learn in their first principles course, so we will not go over it in detail. However, it is interesting to see what this theory has to say about transition economies, and posit some changes to the theory to explain what happened there.

  The key to a functioning market is that both buyers and sellers are sensitive to price, but in opposite directions. As the price rises, sellers offer more units of the good for sale, while buyers are willing to buy fewer units. For example, assume a simple market in which only one kind of good is for sale. There are nine buyers and nine sellers: each of the buyers wants one unit, and each seller has one unit to sell.

  In this textbook example of supply and demand, each seller has a different price that she is willing to take for her good and each buyer has a different price that she is willing to pay. For example, at a price of 9 euro, nine sellers are willing to sell, but only one buyer is willing to buy. If the price falls to 8 euro, one high-cost producer drops out, so only eight units are offered for sale. However, at 8 euro, another customer is willing to buy a unit of the good, so quantity demanded rises to two units.

  Continue this process, and the result is the schedule of quantities supplied and demanded at each price given below (see Table 1.1 ).

  The same information is displayed in Graph 1.1 , with price on the vertical axis, and quantities supplied and demanded on the horizontal axis. The quantity supplied equals the quantity demanded at only one price, 5

  Table 1.1 Schedule of Quantities Supplied and Demanded

  Price in Euros	Quantity Supplied	Quantity Demanded
  9	9	1
  8	8	2
  7	7	3
  6	6	4
  5	5	5
  4	4	6
  3	3	7
  2	2	8
  1	1	9

  euro. This is also the price at which the supply curve and the demand curve intersect, the equilibrium price for this market. The equilibrium quantity for this market is five units. The term “equilibrium” is also significant. Economics demonstrates that markets move toward the equilibrium point, due to the independent actions of market participants (see Graph 1.1

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  An Introduction to Economics

  Concepts for Students of Agriculture and the Rural Sector

  • Berkeley Hill(Author)
  • 2021(Publication Date)
  • CAB International

    (Publisher)

  3 Demand and Supply: the Price Mechanism in a Market Economy

  Introduction

  The study of the demand and supply of goods and services, and the way they interact, forms a fundamental part of economics. Indeed, a surprisingly high proportion of economic problems we come across in everyday life can be explained, although perhaps not solved, by a careful examination of the demand and supply of goods or services. It has even been suggested that a parrot could be turned into a passable economist simply by teaching it to say the words ‘demand and supply’ in reply to all questions.

  By way of introduction to this important area of study let us take an example from agriculture. At various times of the year some farmers want to buy barley while others are willing to sell barley – a demand and a supply both exist. Transactions occur at markets where buyers and sellers can meet each other. These used to be physical places but nowadays this could equally well be Internet websites. Let us imagine that we can select one market on one day (say, in early December) and have the power to ask as many questions as we like. Furthermore, let us imagine that we can dictate what the price of barley is to be.

  If we take all those who wish to buy barley and tell them that the price will be £100/t on that day – assume this is a high price for the particular season – very few farmers will wish to buy any and the quantity sold will be small. If we say that the price will be £90/t, more buyers will be interested. As the price is lowered, increasing interest will be shown – more farmers will wish to buy and each will tend to buy more. If we make a table of the quantity of barley we could sell at various prices we end up with a demand schedule .

  If we moved on to suppliers of barley we would find that at a low price the quantity which they would be prepared to sell would be small. But if we offered a higher figure the quantities offered would increase – more sellers would want to sell and each would want to sell a greater quantity. Again we could draw up a table or schedule of prices and quantities of barley which suppliers would be prepared to supply at these prices.

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  The Economics of European Agriculture

  • Bernadette Andreosso-O'Callaghan(Author)
  • 2003(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  2.3 The Market Mechanism for agricultural products The market is a nexus of interactions between buyers and sellers. The exchange of products is the culminating point of the interactions between economic agents, and this exchange is made possible by the establishment of a price. The price variable is seen as a clearing mech- anism, in that it permits to equate supply with demand. As seen above, the equilibrium price is set at a level that allows the last marginal unit supplied to the market to be sold. The objective of this section is to explain how supply and demand interact, so as to determine equi- librium prices and quantities of agricultural produce to supply. The supply–demand interaction can be: • simple, that is from producer to consumer, or • complex, that is from producer to final consumer, via food com- panies, who process, package, store, transport and distribute the product. Markets are defined on a product as well as on a geographical basis. For any buyer, two products x and y belong to the same market, if they are similar, that is, if the purchase of x brings the same level of utility to the consumer as the purchase of y. Two products x and y are similar, if they are substitutes, that is, if their cross elasticity of demand is above 1. The use of various indicators enables the delineation of the geograph- ical limits of a market (Jacobson and Andreosso-O’Callaghan, 1996). As a result, markets can be regional, national or global. Commodities such as cocoa, wheat, coffee, tea and vegetable oils are traded on a world scale, implying that their markets are global. 2.3.1 The market equilibrium paradigm The economic world described by French economist Léon Walras is one where perfect competition prevails. Walras’ general equilibrium model is used by economists as a reference paradigm, from which more com- plex real world situations can be understood.

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  An Introduction to the Market System

  • Kalman Goldberg(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  Business firms are free to enter industries in which they can realize high profits and to leave industries in which they incur losses. This mobility is a major feature of the competitive process and is a crucial element in the market system. The firms act independently to maximize their profit and, as a moth instinctively moves toward a flame, the entrepreneurs are drawn to those industries with high profit rates. And, as with the moth, they have a hand in their own misfortune, for their increased output tends to lower the price and thus automatically limit profits to the minimum rate at which firms are willing to continue to produce.

  The absence of restrictions on the mobility of firms and factors of production permits resources to be shifted to the industries where prices and profits are highest. But these are the very industries whose goods consumers favor, and consumer demand bids up the prices. Hence, firms searching for the profits generated by high prices rush to meet the desires of consumers. Competition ensures that consumer sovereignty is operative, that firms will be willing, indeed eager, to serve the every whim of consumers—provided it is backed up with buying power.

  The Price Mechanism

  We have outlined the conditions necessary for a market system to operate. In all economic systems, limited factors of production must be allocated in the production of economic goods according to certain social priorities. In the market system, the priorities are based on consumer sovereignty. Individual consumers decide for themselves, on the basis of their income and tastes, which particular bundle of economic goods will give them maximum satisfaction. If consumers are to call the tune, then a way must be found to make certain that producers get the message and dance to it. The price mechanism is this device in the market system.

  What to Produce

  The most popular economic goods and services get the greatest play in the markets. Consumers relay their preferences by simply going into the markets to make purchases. Thereby the prices of the more preferred goods are raised, and the prices of those not favored are lowered. Business firms have only one purpose in mind—maximizing profit. It is to their interest, therefore, to respond to the higher prices by increasing the quantity they supply and to curtail production of the rejected goods. Determining What to Produce follows automatically as a consequence of households and business firms following their own self-interests, with the system structured so that the consumer is the ultimate beneficiary, the one whom the system is designed to serve. There is a harmony of interests because the firm cannot make a profit unless it meets consumer wishes.

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  Principles of Economics in a Nutshell

  • Lorenzo Garbo, Dorene Isenberg, Nicholas Reksten(Authors)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  3

  Led by an invisible hand

  The market

    3.1

  Markets: a general introduction

  We are now ready to introduce one of the most important conceptual frameworks in the study of microeconomics: the concept of the “market.”

  Definition of market : the geographical or conceptual space dedicated to the interactions between economic agents (individuals, firms, and the government) who want to buy a good/service and economic agents who want to sell that particular good/service. Economic agents who want to buy a good/service are said to express a demand for that good/ service. Economic agents who want to sell a good/service are said to express a supply for that good/service. An outcome of the interactions between buyers and sellers of a good/service is the determination of its market price.

  The function of a market – and the way a market works – can be easily understood if you think of the actual function of street markets. If you happen to visit the bazaar of Istanbul or the souk of Marrakesh, for instance, you will inevitably notice that sellers keep calling prices for what they have to sell, and buyers keep negotiating for better prices. Sellers want to obtain the highest possible price, and buyers want to pay as little as possible. At some point the sale is done, at a price that is a compromise between the higher prices asked by the seller and the lower prices offered by the buyer. In the bazaar or the souk this is all typically done loudly and in the open, not something we see very often, but it is a great example of how all markets actually work, even though they do this less visibly.

  The function of the market is to make transactions possible, by determining a price at which buyers and sellers are willing to buy and sell the same amount of the good or service in question . Another way to say this is that, in general, a market for a good or service identifies the equilibrium price

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  Can a Health Care Market Be Moral?

  A Catholic Vision

  • Mary J. McDonough(Author)
  • 2007(Publication Date)
  • Georgetown University Press

    (Publisher)

  They suggest, though, that these tools are still the best available to date for assessing people’s preferences. More-over, they claim there will never be a perfect tool, so economists must use the tools they have, with the understanding that they have certain flaws. Market Mechanisms Many politicians, as well as the popular media, simplify the debate over who should fund and organize health care. They often reduce the arguments to a “government versus the market” theme. In practice the issues are much more complicated. Health care systems are so vast, and they involve such complex management and decision-making problems at so many levels, that the appli-cation of market mechanisms to health care is filled with conceptual as well as practical problems. A number of practices are frequently used in health care, though, including patient choice, negotiated contracts, and open bidding for contracts. Market practices can be used to control price of services or market share. They can be adopted to influence different sectors within health care systems, such as Market Mechanisms | 93 94 | Health Care Economic Theory, Market Mechanisms, and Health Outcomes the funding of health care, the production of health care, and the distribution of funds to service providers. Market incentives can be used to influence the behavior of physicians, nurses, and support staff. The precise role that market mechanisms should play in a socially respon-sible health care system remains hotly debated. Hence, there are many varying models of health care throughout the world. Some systems are hybrid, rep-resenting a combination of market mechanisms with government ownership. Others have a strong government presence and use only a few market mecha-nisms, such as user fees, to help fund the system. Others, like in the United States, rely heavily on market mechanisms and competition.

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  Competition and Entrepreneurship

  • Israel M. Kirzner(Author)
  • 2015(Publication Date)
  • University of Chicago Press

    (Publisher)

  In the theory of price as generally expounded, the function of price is perceived to be something as follows. In a market system the activities of market participants consist of choosing the quantities and qualities of commodities and factors to be bought and sold and the prices at which these transactions are to be carried out. Only definite values of these quantity and price variables are consistent with equilibrium in the price system. In other words, given the basic data (tastes, technological possibilities, and resource endowments), there is only one set of planned activities that permits all of them to be carried out as planned. A theory of price is seen as explaining the determination of this unique pattern of activities, permitting the assignment, in principle, of definite values for the price and quantity variables. The theory of price approaches this task by analyzing how decisions are made by the various market participants—consumers, producers, and factor owners—and examining the interrelations between these decisions under various possible patterns of market structure. In this way the price theorists may, in principle, deduce the constellation of prices and quantities consistent with all of these decisions. (At a more ambitious level the theory may, it is true, aim at understanding not only the equilibrium pattern of prices and quantities, but also paths over time of prices and quantities. At this level of analysis the task of theory is to develop functional relationships, not only between the prices and quantities prevailing at the instant of equilibrium, but also between each of these variables at each instant along the path to equilibrium. This function of price theory, it must be pointed out, is distinctly subordinate to that of the equilibrium analysis. In most treatments of contemporary microtheory, in fact, this function is omitted entirely. Where it is at all seriously treated, its main purpose is seen as the investigation of the stability of equilibrium.)

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  Macroeconomics for Today

  • Irvin B. Tucker, Irvin Tucker(Authors)
  • 2016(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  . . . . . . . . . . . . . . . . . . . . . 4 MARKETS IN ACTION Once you understand how buyers and sellers respond to changes in equilibrium prices, you are progressing well in your quest to understand the economic way of thinking. This chapter begins by showing that changes in supply and demand influence the equilibrium price and quantity of goods and services exchanged around you every day. For example, you will study the impact of changes in supply and demand curves on the markets for Caribbean cruises, new homes, and AIDS vaccinations. Then you will see why the laws of supply and demand cannot be repealed. Using market supply and demand analysis, you will learn that government policies to control markets have predictable consequences. For example, you will understand what happens when the government limits the maximum rent landlords can charge and who benefits and who loses from the federal minimum-wage law. In this chapter, you will also study situations in which The Market Mechanism fails. Have you visited a city and lamented the smog that blankets the beautiful surroundings? Or have you ever wanted to swim or fish in a stream, but could not because of industrial waste? These are obvious cases in which market-system magic failed and the government must consider cures to reach socially desirable results. IN THIS CHAPTER, YOU WILL LEARN TO SOLVE THESE ECONOMICS PUZZLES: • How can a spotted owl affect the price of homes? • How do demand and supply affect the price of ethanol fuel? • Why might government warehouses overflow with cheese and milk? • What do ticket scalping and rent controls have in common? • Can vouchers fix our schools? Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).

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  Microeconomics for MBAs

  The Economic Way of Thinking for Managers

  • Richard B. McKenzie, Dwight R. Lee(Authors)
  • 2016(Publication Date)
  • Cambridge University Press

    (Publisher)

  116 The market economy, overview and application A the time supply decreases, a shortage develops, with the quantity supplied at Q 1 and the quantity demanded at Q 3 . Buyers who want more units of the good than are available at P 1 will bid the price up. As the price rises from P 1 toward P 2 , the quantity demanded decreases from Q 3 to Q 2 ; the quantity supplied rises from Q 1 to Q 2 . The efficiency of the competitive market model Early in this chapter we asked how Fred Lieberman knows what prices to charge for the goods he sells. The answer is now apparent: he adjusts his prices until his customers buy the quantities that he wants to sell. If he cannot sell all the fruits and vegetables he has, he lowers his price to attract customers and cuts back on his orders for those goods. If he runs short, he knows that he can raise his prices and increase his orders. His customers then adjust their purchases accordingly. Similar actions by other producers and custom-ers all over the city move the market for produce toward equilibrium. The information provided by the orders, reorders, and cancellations from stores such as Lieberman’s eventually reaches the suppliers of goods and then the suppliers of resources. Similarly, wholesale prices give Fred Lieberman information on suppliers’ costs of production and the relative scarcity and productivity of resources. The use of the competitive market system to determine what and how much to pro-duce has two advantages. First, it coordinates the decisions of consumers and producers very effectively. Most of the time the amount produced in a competitive market system is very close to the amount consumers want at the prevailing price – no more, no less. Second, the market system maximizes the amount of output that is acceptable to both buyer and seller. In Figure 3.8(a) , note that all the price–quantity combinations accept-able to consumers lie either on or below the market demand curve, in the shaded area.

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