Transcript Power Point: Markets

“Free Market Capitalism is the
worst economic system
except for every other system
ever tried”
Winston Churchill
What makes people pay
more?

Price of a gallon of Perfume
(Channel No.5) is $25,600

Price of a gallon of gasoline is
$2.80

Price of a gallon of tap water is
~$0
2
Capitalism
Economic system in which the means of
production are privately owned
Decisions are made by private actors in a
free market: A market in which there is
NO economic intervention and NO
regulation by the government, except to
enforce private contracts and the
ownership of property.
Free Market Forces
4

Determine what to produce: Choose
winners and losers among goods.

Determine how to produce: Choose
winners and losers among firms.

Determine the “correct” prices.
Free Markets give us the
“correct” price
Goods
Price
Labor
Wage
Money
Interest Rate
What is the fair price of a gallon of gas?
$4?
$1.60?
7
Interestyou
Rates
How much should
pay for a loan?
6.4%?
2.6%?
8
What is the correct price of an hour of work?
Occupation
$51?
Management
Legal
Computer and Mathematical
Architecture and Engineering
Healthcare Practitioners and Technical
Business and Financial Operations
Life, Physical, and Social Science
Arts, Design, Entertainment, Sports, and Media
Education, Training, and Library
Construction and Extraction
Community and Social Service
Installation, Maintenance, and Repair
Protective Service
Sales and Related
Production
Office and Administrative Support
Transportation and Material Moving
Healthcare Support
Building and Grounds Cleaning and Maintenance
Personal Care and Service
Farming, Fishing, and Forestry
Food Preparation and Serving Related
$10?
9
Mean hourly
wage
Annual mean
wage
$51.64
$47.30
$37.85
$37.08
$34.97
$33.05
$32.44
$25.89
$24.46
$21.46
$21.07
$20.86
$20.54
$18.04
$16.45
$16.40
$15.96
$13.16
$12.29
$11.84
$11.68
$10.30
$107,410
$98,380
$78,730
$77,120
$72,730
$68,740
$67,470
$53,850
$50,870
$44,630
$43,830
$43,390
$42,730
$37,520
$34,220
$34,120
$33,200
$27,370
$25,560
$24,620
$24,300
$21,430
What is needed for Competition?
Sellers are
price takers
Market forces
set the price
Sellers have
NO power to
set prices
Sellers react to the price
dictated by “the market”
Sellers choose the
quantity supplied
NOT Perfectly
Competitive Market
What is needed for Competition?
Buyers are
price takers
Market forces
set the price
Buyers have
NO power to
set prices
Buyers react to the price
dictated by “the market”
Buyers choose the
quantity demanded
NOT Perfectly
Competitive Market
Perfectly Competitive Market

Many buyers: no single buyer controls the price

Many sellers: no single firm controls the price

All firms sell identical products: All firms must sell at
the same price

Established firms have no advantages over new firms:
All firms must sell at the same price

Perfect Information: No one can take advantage of
misinformation.

Anyone can enter the industry: No large entry costs.
Perfectly Competitive Market
Free Market Mechanism
1.
Behavior of buyers
2.
Behavior of sellers
3.
Mechanics of the interaction between
buyers and sellers which result in the
“best” price
4.
When we do not like the “best” price
What is needed for Competition?
Market Price
$90,000
Demand Curves
Slope DOWN to the right.
$60,000
A
$30,000
B
$20,000
$15,000
0
19
Buy more as
the price
drops
Quantity
Demanded
increases as
the price
drops
Szekely’s
Demand
1
2
3
4
QUANTITY Demanded (Cars)
Market
Price
$90,000
Most Demand Curves
Slope DOWN to the right.
$60,000
A
$30,000
B
$20,000
$15,000
0
Buy more as
the price
drops Quantity
Demanded
increases as
the price
drops
1
2
3
4
Quantity Demanded (Cars)
Szekely’s
Demand
An increase in Incomes
Szekelys are now Richer
shifts Demand to the
right
$90,000
Buy more
when Income
increases
Demand
increase
when
Rich
Income
Szekely’s
Demand
increases
$60,000
$30,000
$20,000
Poor
Szekely’s
Demand
$15,000
0
1
2
3
4
Q
“Mercedes-Benz is now
worldwide
known
as the top
A change
in Tastes
choice of tyrannical dictators
shifts Demand
and corrupt politicians”
P
$170,000
$150,000
Buy less when
tastes change
Demand decrease
when tastes change
$120,000
$100,000
Colombian
Government
Demand
$90,000
0
23
10
20
Q
30
40
Price
$100,000
Buy more
Tesla
$90,000
A drop in Price of a
Buy
fewer
substitute
good
shifts
Mercedes
Demand to the left
Price
$80,000
$70,000
$60,000
0
10 20 30 40
Quantity Tesla
Quantity Demanded
increases as the price
drops
Quantity Mercedes-Benz
PRICE per unit
$90,000
$60,000
$30,000
$20,000
Is a point on the
Demand line
Is different for
each price
Changes when the
price changes
$15,000
0
26
1
2
3
4
QUANTITY Demanded
Changes in Quantity Demanded are
represented by a Movement Along
the Demand Curve
Changes in Quantity
Demanded are caused
150
by a change in the price
120
100
A
B
50
30
0
0
D
6 10
20 24 30
Demand
Price
$90,000
Is the entire
Demand line
$60,000
It changes with
changes in:
Incomes, Tastes,
Prices of related
goods and
expectations.
$30,000
$20,000
$15,000
0
The complete set
of price and
quantity
demanded for
an individual
1
2
3
4
QUANTITY Demanded
Changes in Demand are represented by
SHIFTS of the entire line
Price
Changes in Demand
are caused by changes
in Incomes, Tastes,
Prices of related goods
and expectations
0
10
20
30
Quantity Mercedes-Benz
40
The less expensive an item is…
The Law of
Demand
$2
Implies that
$1.5
$1
$0.5
1
30
Demand Curves
Slope DOWN to
the right.
2
3
4
The more units we buy
The Ceteris Paribus
Assumption
Means that all other factors –Income,
taste, prices of related goods and
expectations
affect means
a buyer’s
“Other thingsthat
constant”
that all
decision
are assumed
to from
remain
other factors
–different
the
constant,
whether
actually
price- that
affectthey
a buyer’s
decision
remain
constant or
not.
are assumed
to remain
constant
31
Use the law of demand to predict how buyers
will react to a decrease in the price of cars.
 Quantity Demanded increases: IF and
only IF nothing but the price changes.
What if at the same time that car prices drop,
incomes also drop?
 We can not use the law of demand.
Two variables changed (income and
prices).
32
Use the law of demand to predict how buyers will
react to a decrease in the price of California
wines.
Quantity Demanded increases: IF and only IF
nothing but the price changes.
What if at the same time the price of French
wines also drops?
We can not use the law of demand. Two
variables changed (price and price of a related
good).
33
Use the law of demand to predict how
buyers will react to a decrease in the price
of jeans.
Quantity Demanded increases: IF and only IF nothing
but the price changes.
Suppose that Bluefly jeans were $240 at
Nordstrom and now they are available at
Costco for $19.99!
We can not use the law of demand. Two
variables changed (tastes and prices).
34
Use the law of demand to predict how buyers
will react to a decrease in the price of pork
Quantity Demanded increases: IF and only
IF nothing but the price changes.
At the same time a news report warns of
infected pork meat.
We can not use the law of demand. Two
variables changed (price and tastes).
35
The Law of Demand
When the price drops ceteris paribus
the quantity demanded increases
and vice versa.
36
Normal Goods
Goods that people buy
more when their income
increases
Goods that people buy less
when their income
decreases
Demand for Normal Goods
Increase when income increases
Demand for Normal Goods
Decrease when income decreases
37
Inferior Goods
Goods that people are
forced into buying when
incomes drop.
Goods that people buy less
or stop buying when
income increases.
Demand for Inferior Goods
Decrease when income increases
Demand for Inferior Goods
Increase when income decreases
Substitute Goods:
Goods that can serve as replacements for one
another.
When one of the goods becomes more
expensive, demand for the other good
increases.
39
Complements
Goods that are used together.
When one becomes more expensive, we buy
fewer units of both goods.
Price
0
10
20
30
Quantity
40
40
Complements? Substitutes?

Fuel oil, natural gas, coal, nuclear fuels, windmills.

ipods and itunes

Video game consoles and video games

Computers and software/printers/internet service

Butter and margarine

Wood and bricks

Printers and ink cartridges.

Hamburgers and French fries

Cars and gasoline

Phone service and phones
41
Expectations
Consumer beliefs about what will happen in the
future.
 When consumers expect an increase in
price of a good in the future, they will
increase their purchases of the good
TODAY.
 When consumers expect an increase in
their Income in the future, they will
increase their purchases of the good
TODAY.
Price is
the same
Price
decreased
a
Price
increased
a
b
Quantity
increased
Increase in demand
b
Increase in
quantity demanded
c
Price is
the same
d
Quantity
decreased
Decrease in quantity
demanded
c
Decrease in demand
d
Apple iPhone and Samsung cell phones are
substitutes
Price
Price of Samsung increases.
Price
D
iPhones
44
What happens
to quantity
demanded of
Samsung
phones?
What happens
to the demand
Samsung
phones?
D
Samsung
Price of Samsung increases.
Demand for
Samsung does
not change
Price
A decrease in
Quantity Demanded.
Increase in
Price of
Samsung
D1
0
45
Quantity demanded
iPhones and Samsung are substitutes
Price
An increase in
Demand.
Price of Samsung increases.
Price
D
iPhones
What will happen to the
demand iPhones?
D
Samsung
46
iPods and iTunes songs are complement goods
Price of Ipod decreases
What will happen to the
quantity demanded for ipods?
What will happen to the
demand for ipods? No change
What will happen to the
demand for itunes?
a
b
b
a
c
d
47
“The current trade agreement between the US and
France will expire at the end of next month. This
will result in higher prices on French goods”.
What will be the effect on demand for French wine
today? a
What will be the effect on demand for French wine
once tariffs are re-established and prices increase?
What will be the effect on quantity demanded of
French wine once tariffs are re-established and
prices increase?
c
a
b
c
d
48
49
50
51
52
P
From the Individual demand
curves to Market demand:
P
DA
P
DC
DB
$3.50
$3.50
$3.50
$1.50
$1.50
$1.50
8
4
P
$3.50
Qd
0
3
Qd
4
9
Qd
Market Demand = Horizontal Sum
of Individual Demands
$1.50
0
8
20
Qd
When more consumers come
into the market
The market demand increases: shifts to the
right
55
Demand Shifts
Prices of related goods
(complement/substitute)
Incomes(Normal/inferior)
Tastes and Preferences
Expectations(today/future)
Number of consumers in the market
(population)
56
160
160
160
120
120
120
80
80
80
40
40
40
10
20
20
30
40
60
80
Market Price
160
120
80
40
Market
Demand
?
?
?
?
100 150 200 300