PSUT – Master of Business Entrepreneurship Program
33766 Business Economics
Spring 2017
Presentation of Assignment 2 – March 23, 2017
Market Mechanism – Explanation
Instructor:
Students:
Dr. Mohammed Shahateet
Hiba S. Abbadi [20158038]
Explanation of
Market
Mechanism
It sounds
simple. It raises
a lot of
questions
though!
Market Mechanism – Explanation
Did Adam Smith describe a
law of economics similar to
a natural law,
OR is the
market mechanism only a
model or idealization that
describes an optimal way
to produce and distribute
goods and services
?
33766 Business Economics
Hiba S. Abbadi [20158038]
Presentation of Assignment 2 – March 23, 2017
Market Mechanism – Explanation
1
People
sometimes
refer
to
prices as “too high” or “too
low” as a judgment about the
way they think the world
should be.
It is like saying weather is “too
cold” or “too hot”.
Such
judgments tell something about
preferences of the person
expressing the opinion, but they
do not tell you why price (or
temperature) is actually at the
level that it is.
33766 Business Economics
Hiba S. Abbadi [20158038]
Presentation of Assignment 2 – March 23, 2017
Market Mechanism – Explanation
2
There is a difference between
“use value” and “exchange
value”.
Adam Smith used diamondwater paradox to describe this
difference: Diamonds have
high value in exchange, but
little value in use. Water has
little value in exchange but
high value in use.
For economists, prices are only
about “exchange value”.
33766 Business Economics
Hiba S. Abbadi [20158038]
Presentation of Assignment 2 – March 23, 2017
Market Mechanism – Explanation
3
Prices
are
nothing
but
a
relation between supply and
demand.
33766 Business Economics
Hiba S. Abbadi [20158038]
Presentation of Assignment 2 – March 23, 2017
Market Mechanism – Explanation
4
Demand
and
supply
have
specific meanings.
Demand – the relationship
between quantity demanded
and any given price. Demand
curves slope down, which
shows that quantity demanded
tends to fall as price rises.
Demand is not the same as
quantity demanded. Demand
curve
only
indicates
relationship between quantity
demanded and range of
possible prices.
The same applies to the supply
curve.
33766 Business Economics
Hiba S. Abbadi [20158038]
Presentation of Assignment 2 – March 23, 2017
Market Mechanism – Explanation
5
Demand for a certain good
can shift for a variety
reasons – changes in:
of
o
Income
o
Population
o
Tastes or
o
Prices of complement
or substitute goods
33766 Business Economics
Hiba S. Abbadi [20158038]
Presentation of Assignment 2 – March 23, 2017
Market Mechanism – Explanation
6
Supply
is
the
relationship
between quantity supplied and
any given price.
Supply curves slope up, which
means quantity supplied tends
to increase as price rises.
33766 Business Economics
Hiba S. Abbadi [20158038]
Presentation of Assignment 2 – March 23, 2017
Market Mechanism – Explanation
7
Supply for a certain good can
shift for a variety of reasons –
changes in:
o
Technology
o
Weather
o
Prices
of
ingredients
key
33766 Business Economics
Hiba S. Abbadi [20158038]
Presentation of Assignment 2 – March 23, 2017
Market Mechanism – Explanation
8
Equilibrium
price
is
where
quantity demanded is equal to
quantity supplied.
Demand and supply determine
the equilibrium price.
If price is temporarily above
equilibrium,
then
quantity
supplied exceeds quantity
demanded, which tends to
drive the price down to
equilibrium.
If price is temporarily above
equilibrium,
then
quantity
demanded exceeds quantity
supplied, which drives the
price up to equilibrium.
33766 Business Economics
Hiba S. Abbadi [20158038]
Presentation of Assignment 2 – March 23, 2017
Market Mechanism – Explanation
9
The
equilibrium
price
and
quantity create efficiency in
the sense that extra quantities
are not up on shelves, nor are
buyers waiting in line.
33766 Business Economics
Hiba S. Abbadi [20158038]
Presentation of Assignment 2 – March 23, 2017
Market Mechanism – Explanation
10
A shift in demand or
supply will lead to a
new
point
of
equilibrium.
In this way – shifts in
demand and supply
can
explain
movements in prices
and
quantities
of
goods observed in
markets.
33766 Business Economics
Hiba S. Abbadi [20158038]
Presentation of Assignment 2 – March 23, 2017
Market Mechanism – Explanation
11
The supply and demand
model is a framework for
discussing how prices and
quantities are determined
in markets and why they
change.
The model argues that
markets move towards
equilibrium
and
thus
efficiency.
It does not
argue that people are
happy with the prices.
Typically, buyers will prefer
the price to be lower –
while sellers would prefer
the price to be higher.
33766 Business Economics
Hiba S. Abbadi [20158038]
Presentation of Assignment 2 – March 23, 2017
Market Mechanism – Explanation
12
Most people do not think in
terms of demand
supply model.
and
But if consumers look for
the goods they prefer at
the lowest possible price
and firms adjust their
production in response to
changes in price – then
people and firms are
acting in accordance with
the model.
33766 Business Economics
Hiba S. Abbadi [20158038]
Presentation of Assignment 2 – March 23, 2017
Market Mechanism – Explanation
13
The test of the supply
and demand model is
whether it works as a
method
of
understanding
the
determination
of
prices and quantities.
As a scientific model –
it does work for all sorts
of products, in markets
all over the world, and
at different times of
history.
33766 Business Economics
Hiba S. Abbadi [20158038]
Presentation of Assignment 2 – March 23, 2017