Transcript 08_buyers_and_seller..

Buyers and Sellers
Determine Prices
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Goals of Buyers and Sellers
BUYERS
SELLERS
Infinite Price
Make a transaction
Make a transaction
Zero price
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The Process of Price
Determination
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COMPETITION IS THE
REGULATOR
It constrains buyers and sellers.
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Competition is the Regulator
“If he charges too much for his wares, or if
he refuses to pay as much as everybody else
for his workers, he will find himself without
buyers in the one case, and without workers
in the other.”
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Buyers want the lowest possible price,
but....
Price
DEMAND
For
Sale
Quantity
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they have to compete against all
other buyers.
Price
Quantity
For
Sale
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Sellers want to charge the highest
price possible, but ......
Price
Supply
For
Sale
Quantity
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they have to compete against all
other sellers.
Price
Supply
Quantity
For
Sale
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Competition determines the
Equilibrium Price
Price
SUPPLY
Demand
Quantity
For
Sale
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How are prices determined?
• Buyers competing against each other drive
the price up
• Sellers competing against each other drive
the price down
• Equilibrium Price is determined by the
impersonal forces of supply and demand
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About the buyers
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Influences on the sellers
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Reservation Prices
• Sellers
– Supply price
– The lowest price that a seller is willing and able to
accept for a particular quantity of a particular product
• Buyers
– Demand price
– The highest price that a buyer is willing and able to pay
for a particular quantity of a particular product
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At the equilibrium price
• Buyers who are able and willing to pay the
price get the goods and services they desire
• Sellers who are able to produce at that price
sell all that they wish
• There are neither surpluses nor shortages
• Not all prospective buyers or sellers are
satisfied
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Relative Prices
Income = $30,000
$40
$10
$20
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Relative Prices Have Not Changed
Income = $30,000
Income = $60,000
$40
$80
$10
$20
$20
$40
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Supply – a relationship
Price
Quantity
Supplied
$10
5
$9
4
$8
3
$7
2
$6
1
$5
0
$4
0
$3
0
$2
0
$1
0
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The Law of Supply
• Once all other factors have been
considered, the quantity supplied of a
product varies directly with the price of
the product.
• If the price rises, the quantity supplied
will rise; if the price falls, the quantity
supplied will fall.
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Demand – a relationship
Price
Quantity
Demanded
$10
0
$9
0
$8
1
$7
2
$6
3
$5
4
$4
5
$3
6
$2
7
$1
8
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The Law of Demand
• Once all other factors have been
considered, the quantity demanded of a
product varies inversely with the price
of the product.
• If the price rises, the quantity
demanded will fall; if the price falls,
the quantity demanded will rise.
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Price Elasticity of Demand
• Measure of the strength of buyers’ reactions
to price changes
• If buyers don’t react very strongly, inelastic
• If buyers react strongly, elastic
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Determinants of
Price Elasticity of Demand
• availability of substitutes
• percentage of income
• time
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Price Elasticity of Supply
• Strength of seller’s response to price change
• Determinants
– time
– use of easily transferable resources
– divisibility of inputs.
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Equilibrium Price and Quantity
Exchanged
Price
Quantity
Supplied
Quantity
Demanded
$10
5
0
$9
4
0
$8
3
1
$7
2
2
$6
1
3
$5
0
4
$4
0
5
$3
0
6
$2
0
7
$1
0
8
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The Equilibrium Price
• Quantity supplied equals quantity
demanded
• No shortages or surpluses
• The market clears
• Scarcity is not eliminated
• The measure of relative scarcity
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Relative Price: unit by which we
measure relative scarcity scarcity
(Units on the Scarcometer)
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Order these products in terms of
relative scarcity
yacht
candy bar
dinner for one at MacDonalds
a nice dinner for two in LA
laptop computer
Toyota mini truck
ticket to a professional baseball game
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Main Points
• The Law of Demand states that a
higher price will cause a decrease in
the quantity demanded and a lower
price will cause an increase in the
quantity demanded.
• A demand schedule is a relationship
between prices and quantities
demanded.
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Main Points
• The Law of Supply states that a higher price
will cause an increase in the quantity
supplied and a lower price will cause a
decrease in the quantity supplied.
• A supply schedule is a relationship between
prices and quantities supplied.
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Main Points
• Price elasticity of demand is the strength of
the buyers’ response to price changes.
• The determinants of price elasticity of
demand are availability of substitutes,
percentage of income, and time.
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Main Points
• Price elasticity of supply is the measure of
the strength of seller’s response to a price
change
• The determinants of price elasticity of
supply are time, use of easily transferable
resources, and divisibility of inputs.
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Main Points
• Buyers and sellers (demand and supply) determine
equilibrium price and quantity exchanged.
• At the equilibrium price, the number of items that
sellers are willing and able to offer for sale equals
the number of items that buyers are willing and
able to purchase.
• Relative scarcity is the relationship of supply and
demand.
• Price is the measure of relative scarcity
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