Transcript The Economic Way of Thinking 10e ©Prentice Hall 2003 Questions

“The Economic Way of Thinking”
10th Edition
by Paul Heyne, Peter Boettke,
and David Prychitko
“Supply and Demand: A Process of
Cooperation”
PowerPoint Slides prepared by
Assistant Professor
Paul Harris
Camden County College
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The Economic Way of Thinking 10e
©Prentice Hall 2003
Chapter Outline
I.
II.
Introduction
The Market is a Process of Competing
Bids and Offers
III. Transaction Cost
IV. Property Rights and Institutions
V.
The Coordinating Role of Money
Prices
VI. The Basic Process
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The Economic Way of Thinking 10e
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Chapter Outline
VII. Competition, Cooperation, and Market
Clearing.
VIII. Changing Market Conditions
IX. The Urge to Fix Prices
X. Competition When Prices are Fixed
XI. Appropriate and Inappropriate Signals
XII. Competition Results From Scarcity
XIII. Once Over Lightly
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The Economic Way of Thinking 10e
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Introduction
• Specialization is what distinguishes every
wealthy society the world has ever known.
Adam Smith observed……..
“It is the great multiplication of
the productions of all the different
arts, “in consequence of the division
of labour” which occasions, in well
governed society, that universal
opulence which extends itself
to the lowest ranks of the people.
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Introduction
How do wealthy highly specialized commercial
societies know to take the actions necessary
wind up producing the myriad of goods and
services they enjoy?
Answer…
Massive ignorance, since specialist by their very
nature don’t know how to do everything.
The miracle of the market is that millions of
people globally, manage to cooperate together
to produce the goods and services that we
enjoy.
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Introduction
• The role of government in these societies is
to …
Monitor
property
rights.
Enforce
contracts
Enforce
property
rights.
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The Market –
Competing Bids and Offers
Markets are not necessarily physical
places.
They are mechanisms which brings together
buyers and sellers, demanders and
suppliers.
A market can be formal, but many markets are
informal.
A market is not a person place or thing.
It is a process of competing bids and offers.
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Transaction Cost
Transaction costs are the costs of
arranging contracts or transaction
agreements between demanders and
suppliers.
It isn’t enough that demanders are willing
to what suppliers would require.
Someone needs to arrange the the actual
transaction.
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Transaction Cost
Questions……
Why does broken glass stay on a bicycle trail
even if each bicyclist would pay someone to
clean it up?
Why don’t commuters in no hurry clear the
way for those who are?
Why does even the most environmentally
aware person contribute to its degradation?
Why did food rot in the fields in the U.S.S.R.
when people were starving?
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Transaction Cost
Questions……
• Why does broken glass
stay on a bicycle trail
Answer:
even if eachWhen
bicyclist
wouldcosts
payare
someone to
transaction
clean it up? too high, the result will
• Why don’t be
commuters
no hurry clear the
a failure of in
cooperation.
way for thoseAll
who
are? questions
of these
illustrate
a failure
of
• Why does even
the most
environmentally
cooperation
because
thedegradation?
cost
aware person
contribute
to its
of arranging the transaction
• Why did food rotare
in too
thehigh.
fields in the U.S.S.R.
when people were starving?
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Property Rights and Institutions
Private Ownership
People have the incentive to take control of
resources.
Resources will quickly and cheaply come
together.
Low Transaction Costs
Allow negotiations necessary to produce
goods and services to succeed
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Property Rights and Institutions
Questions…
Why are the countries that are
attempting to move to a market system
facing high transaction costs?
Can they design an efficient system?
Can they do it quickly?
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Property Rights and Institutions
Questions…
Why are the countries that are attempting to
move to a market system facing high
transaction costs?
Can they design an efficient system?
Can they do it quickly?
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Property Rights and Institutions
Questions…
Answer…..
The
success ofthat
market
Why are the
countries
are attempting to
many high
move to areform
marketprojects
systeminfacing
nations depends
transaction costs?
on overcoming the
Can they design
an efficient
problem
of high system?
Can they do ittransaction
quickly? cost
rapidly.
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The Coordinating
Role of Money Prices
• Question……….
– Why is money used in
exchanges instead of barter?
• Answer………
– Money is a general medium of
exchange.
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The Coordinating
Role of Money Prices
Money’s Advantages
Lowers transaction costs
Acceptability
Provides signals quickly
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The Basic Process
Supply and Demand in the Acoustic Guitar Market
S
$700
$500
$300
D
800
1000
1,200
Quantity of Acoustic Guitars
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The Basic Process
Supply and Demand in the Acoustic Guitar Market
S
$700
The Market clears at $500
$500
$300
D
800
1000
1,200
Quantity of Acoustic Guitars
The Economic Way of Thinking 10e
©Prentice Hall 2003
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The Basic Process
Supply and Demand in the Acoustic Guitar Market
S
$700
$500
$300
A shortage of
400 guitars
At $300
800
1000
D
1,200
Quantity of Acoustic Guitars
The Economic Way of Thinking 10e
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The Basic Process
Supply and Demand in the Acoustic Guitar Market
$700
A surplus of
400 guitars
at $700
S
$500
$300
D
800
1000
1,200
Quantity of Acoustic Guitars
The Economic Way of Thinking 10e
©Prentice Hall 2003
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Competition, Cooperation,
and Market Clearing
• Competition, like cooperation, is
rampant throughout the market
process.
• Rather than competition between
buyer and seller;
– Buyers tend to compete with other
buyers.
– Sellers tend to compete with other
sellers.
The Economic Way of Thinking 10e
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Competition, Cooperation,
and Market Clearing
In the case of a shortage, buyers compete with
one another by offering higher prices, and the
bidding process eliminates the shortage.
In the case of a surplus sellers compete
amongst themselves by trying to attract
customers and move excess inventories.
Each seller would compete with lower
prices until the surplus disappears.
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Competition, Cooperation,
and Market Clearing
• In the case of a shortage, buyers
compete with one another by offering
With
individual
buyers
bidding up process
higher
prices,
and
the bidding
prices when
there are shortages,
eliminates
the shortage.
and sellers reducing prices when
• In thethere
caseare
ofsurpluses,
a surplus
the sellers
market compete
amongst
themselves
trying
system,
through theby
forces
of to attract
supplyand
and demand
a
customers
move settles
excessoninventories.
market clearing price. The clearing
– Each
seller would compete with lower
price is the equilibrium quantity,
prices until the surplus disappears.
and price
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Competition When
Prices Are Fixed
• Question…
– What happens if the price of a
good is not allowed to rise
when it becomes more
scarce?
• Answer….
– Government imposed price
ceilings cause shortages, and
make it necessary for the
government to ration the
product.
The Economic Way of Thinking 10e
©Prentice Hall 2003
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Competition When
Prices Are Fixed
P
D
S
Nonmonetary
costs
Legal
ceiling price
Money
costs
shortage
Q
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Competition When
Prices Are Fixed
• Question……
– What are the non-monetary costs?
• Answer…….
– Waiting lines
– Restraining activity
– Striking deals
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Appropriate and
Inappropriate Signals
Question….
What will suppliers do if a law prevents them
from raising their prices when a shortage
exists?
Answer…
Prices provide signals.
Price Ceilings
Suppliers and demanders receive incorrect
signals
Effective accommodation does not occur
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Competition Results
from Scarcity
Scarce Goods
When people cannot obtain as much of a good
as they would like without being required to
sacrifice something else of value.
Rationing
Prices ration scarce goods
Competition
A result of scarcity
Occurs when people strive to meet the criteria
that is being used to ration scarce goods
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From Scarcity to Competition
P
S
Scarce good
D
Q
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From Scarcity to Competition
P
D
S
A nonscarce good
Q
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Surpluses and Scarcity
Surplus
Occurs when quantity supplied exceeds quantity
demanded
Surplus of Teachers
Decreasing wages motivates people to look at
different careers.
Question
How would school systems respond if they were not
allowed to reduce wages?
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Surpluses and Scarcity
• Surplus of Doctors
– Number “needed” is quantity
demanded at the current price.
• Question
– What would this surplus do to
wages and prices?
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Market Processes Versus
Central Planning
A socialist economy would be run like one
huge non-profit organization.
They utilize a system of central planners, to
perform the functions that we take for granted,
and which occur automatically in a market system.
There is no efficient way to effectively and
efficiently produce and distribute the massive
array of goods and services desired by millions
of citizens.
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Once Over Lightly
Society is
characterized by
extensive division of
labor.
The market is a
process of competing
bids and offers.
Intermediaries
facilitate exchange
and reduce
transaction cost.
Transaction cost is
the cost of arranging
contracts or or
transaction
agreements between
suppliers and
demanders.
Money is used as a
medium to facilitate
exchange.
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The Economic Way of Thinking 10e
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Once Over Lightly
The market clears
when quantity
demanded equals
quantity supplied.
Exchange is a
cooperative
activity.
Scarce goods must
be rationed in
some fashion.
Surpluses and
shortages arise
when the market
price is above or
below the
equilibrium price.
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The Economic Way of Thinking 10e
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Next Chapter 6
Supply and Demand:
Issues and
Applications
End of Chapter 5