Markets and you

Journal of Agricultural and Applied Economics, Aug 2002 by Turner, Steven C

Markets are at the center of what many of us do each day, although sometimes it is easy for us to forget this fact. The broadest approach to analyzing markets includes a vast array of situations and consequences. My role here is to remind us of the importance of markets. In addition, any particular individual needs to understand their situation with respect to the markets in which they operate. This same principle holds for firms or organizations. Thus, it is appropriate for our Association to examine its position within the organizational market.

It might be beneficial to explain my perspective, which is one of marketing economics. This perspective assumes we have markets or can develop markets to handle exchange. I have wholeheartedly bought into the neoclassical microeconomic paradigm. I am the first to admit this bias, which supports most of my efforts in the economic arena. Furthermore, I will assume I am preaching to the choir today.

Markets

Our paradigm begins with an assumption about how people behave: they maximize either utility (subject to a budget constraint) or profits. This is a cruel perspective of mankind, but it has suited us well and is probably as effective a viewpoint as any. If you accept this assumption, a microeconomic framework can be developed to examine a host of problems related to a particular good or service at any point in time and at any location. This essentially is the Bressler and King approach to market analysis, which I believe is simple and robust for most situations. The problem with life is that it is a movie and not a picture. And life is multidimensional, not just two- or threedimensional. Thus, it becomes necessary to take the common picture that defines who we are and move it through time, space, and form. There are probably other dimensions that we should consider, but that will be left to George Lucas. We can consider moving our picture through time by imagining three dimensions: price, quantity, and time. So basically, we combine two common graphs into one graph. This approach is interesting to some extent and can be useful in understanding the importance of information in the determination of prices.

So we begin with the standard supply and demand schedules that determine an equilibrium price and quantity. Of course, perfect information is assumed. When this assumption is relaxed, there is less preciseness but more realism. We see this in Figure 1, where in any period we get a range of possibilities with respect to price and quantity. Figure 1 simplifies the situation even further by assuming that a fixed supply will exist at time t^sub 1^. The problem is that the information about supply at tl is not certain. In fact, supply could be between S^sub H^ (high supply) and S^sub L^ (low supply). If we rotate Figure 1 over time, it becomes the familiar bar chart, with each bar representing the range of prices for the specified period (Figure 2). The two-dimensional bar chart enables one to examine price in a particular market over time.

When we use three dimensions, time, price, and quantity, the result is Figure 3. Remember, there is economic theory behind our most simple and complex pictures. This is something we should not forget, because much of our analysis relates to supply and demand or their determinants.

The time dimension of markets is crucial to most economic problems. It opens up opportunities for those in advantageous positions and poses threats to those in precarious positions. For example, there are short-term buyers and sellers and long-term buyers and sellers. Here, long-term refers to a situation in which there is no immediate need to trade, while short-term implies an immediate need to trade. In general, it is advantageous to lengthen your time horizon. Futures markets help to do this, as does storage. Long-term buyers are usually looking for short-term sellers and vice versa. The importance of knowledge and information to the ability to recognize opportunities and threats cannot be overstated. We will revisit this idea when we discuss individuals and their interaction with markets.

Another dimension of any market is space, or location. My favorite graph in all of economics is the back-to-back diagram of trade between different regions, with its excess demand and supply curves (Figure 4). We know that if trade is allowed between the regions, then quantity and price will adjust to take into account the different supply and demand schedules and transfer costs. Several things should be mentioned here. First, there are opportunities and threats associated with trade. Usually, consumers reap benefits from trade, as do low-cost producers, while higher-cost producers usually see increased trade as a threat. Again, the market is concerned only with clearing and takes no account of the ramifications to the affected party. Of course, social welfare considerations can be developed, but injured parties rarely take this tack because the total benefits from trade are often greater than the costs.