How Markets Work and Business Opportunities
At your high school fair, the crepe stand lowers its price from $\$30$ to $\$20$ and right away a huge line forms. Nobody decided that in a meeting: the market caused it. Why the line? By the end of this page you'll be able to explain it with a table and a graph.
The market: where buyers and sellers meet
A market doesn't need a physical place. The Saturday street market is a market, but so is an app for buying and selling used cell phones, a tutoring service, or sales of secondhand video games. What matters is that there is someone who offers, someone who demands, and a voluntary exchange.
Explain what a market is and why it does not need to be a physical place. Name three different markets you use (a physical one, an online one, and one for 'things' that…
Explain what a market is and why it does not need to be a physical place. Name three different markets you use (a physical one, an online one, and one for 'things' that do not look like goods, such as private tutoring hours).
Supply, demand, and equilibrium
Economists represent markets with models: simplifications of reality made with tables and graphs. Let's start with a table.
Let's look at the aguas frescas (fruit drinks) at a street market, cups sold in one day:
| Price $P$ (pesos) | $Q_d$ (cups) | $Q_s$ (cups) | Situation |
|---|---|---|---|
| 5 | 100 | 20 | Shortage of 80 |
| 10 | 80 | 40 | Shortage of 40 |
| 15 | 60 | 60 | Equilibrium |
| 20 | 40 | 80 | Surplus of 40 |
| 25 | 20 | 100 | Surplus of 80 |
If we take those data to the coordinate plane (price on the vertical axis, quantity on the horizontal axis), demand slopes down from left to right and supply slopes up.
You can move the curves and see how the equilibrium price and quantity change:
State the law of demand and the law of supply in your own words. Apply them to this case: at the school fair, the crêpe stall lowers its price from $\$60$ to $\$40$;…
State the law of demand and the law of supply in your own words. Apply them to this case: at the school fair, the crêpe stall lowers its price from $\$60$ to $\$40$; what do you expect to happen to the quantity students want to buy and the quantity the stall would want to sell?
The diagram shows the market for bracelets at the school fair: the demand curve (D), the supply curve (S), and the point where they intersect (E). a) Read the…
The diagram shows the market for bracelets at the school fair: the demand curve (D), the supply curve (S), and the point where they intersect (E).
- a) Read the equilibrium price and quantity from the graph.
- b) Explain what that point E means: what happens to the surplus bracelets or to the buyers left without a bracelet at that price?
In the juice market at the fair, the following data was recorded: | Price | Willing sellers (glasses) | Interested buyers (glasses) | | --- | --- | --- | | $\$20$ | $20…
In the juice market at the fair, the following data was recorded:
| Price | Willing sellers (glasses) | Interested buyers (glasses) |
|---|---|---|
| $\$20$ | $20$ | $80$ |
| $\$40$ | $50$ | $50$ |
| $\$60$ | $80$ | $20$ |
- a) State the equilibrium price and justify your answer.
- b) Explain what disequilibrium exists at $\$20$ and $\$60$, and how that pushes the price towards equilibrium.
What shifts supply and demand
When something other than the good's own price changes, the whole column of quantities changes: the curve shifts. That's why a second column is used.
Example: bouquets of flowers close to Valentine's Day (February 14). Each bouquet of roses has its normal $Q_d$ and a $Q_d'$ for that date:
| $P$ (pesos) | Normal $Q_d$ | $Q_d'$ (February 14) | $Q_s$ |
|---|---|---|---|
| 50 | 100 | 140 | 20 |
| 100 | 80 | 120 | 40 |
| 150 | 60 | 100 | 60 |
| 200 | 40 | 80 | 80 |
With normal demand, the equilibrium is $P = \$150$ and $Q = 60$ bouquets. With the February 14 demand ($Qd'$), the equilibrium is $P = \$200$ and $Q = 80$. That's why flowers cost more that day: demand increased, and both price and quantity went up.
Suddenly it becomes fashionable among nearby secondary schools to wear your cooperative's bracelets. Explain which curve shifts, in which direction, and what is to be…
Suddenly it becomes fashionable among nearby secondary schools to wear your cooperative's bracelets. Explain which curve shifts, in which direction, and what is to be expected of the new equilibrium price and quantity. What should the cooperative do if it wants to ride this wave?
When the price is controlled
Sometimes the authorities (or an organizing group) set a price instead of letting it adjust. There are two cases.
With the aguas frescas: if a price ceiling of $\$10$ is set (the equilibrium is $\$15$), the table gives $Q_d = 80$ and $Q_s = 40$. There is a permanent shortage of $40$ cups.
So that 'nobody goes without a snack', the school market organising team sets a maximum price ceiling of $\$20$ per portion when the equilibrium would be $\$50$. After…
So that 'nobody goes without a snack', the school market organising team sets a maximum price ceiling of $\$20$ per portion when the equilibrium would be $\$50$. After half an hour, nothing is left and many students leave without a snack while others have bought three portions.
- a) Explain using supply and demand why shortages occur.
- b) Propose two solutions that maintain the community spirit without causing queues or reselling, and analyse their effects.
Microenvironment and macroenvironment: business opportunities
Anyone who wants to start a business needs to see the market they are going to enter. To do that, what surrounds the business is separated into two circles.
The practical difference: you can act on the microenvironment (switch suppliers, come to an agreement with regular customers). With the macroenvironment you can only anticipate and adapt.
From imbalance to opportunity
An imbalance that keeps repeating (always long lines, a product that always goes unsold) points to a poorly met need. It is the clue to a business opportunity.
A lemonade stand next to the sports center analyzes its environment. Classify each factor into microenvironment (near, directly affects the business) or macroenvironment…
A lemonade stand next to the sports center analyzes its environment. Classify each factor into microenvironment (near, directly affects the business) or macroenvironment (general, affects everyone): (a) another juice stand $50$ meters away; (b) the nationwide rise in the price of sugar; (c) the lemon supplier failing to deliver on Mondays; (d) teenagers becoming increasingly concerned about sugar; (e) a new law on allergens. Explain the difference in your own words.
On Sunday mornings, queues of $20$ minutes form at the only open bakery in the neighbourhood; the other two are closed. Nobody sells takeaway pastries in the nearby…
On Sunday mornings, queues of $20$ minutes form at the only open bakery in the neighbourhood; the other two are closed. Nobody sells takeaway pastries in the nearby park, which is full of families.
- a) Describe the imbalance between supply and demand there, using market terminology.
- b) Propose a concrete business opportunity based on that imbalance and analyse two risks that could cause it to fail.
Two friends want to sell lemonade on Saturdays next to the sports center. Before taking the plunge, they analyze: who passes by, what else is sold nearby, where they…
Two friends want to sell lemonade on Saturdays next to the sports center. Before taking the plunge, they analyze: who passes by, what else is sold nearby, where they will get the lemons, what the municipal regulations say about stalls, and what the weather is usually like in their town during those months.
- a) Classify each analysis as microenvironment or macroenvironment and explain what decision they would make with each piece of information.
- b) Write the sentence that summarizes their business opportunity: what they sell, to whom, and why there.
Back to the beginning: if the equilibrium for crepes was at $\$30$, dropping to $\$20$ puts it below the equilibrium: $Q_d > Q_s$. There is a shortage, and the line is the signal that the price should go back up.