Transcript Price

Chapter 2
Demand and Supply:
The Basics of the
Market Economy
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Objectives
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Basics of Market Economy
Local, National and Global Markets
Prices Defined
Demand Defined
Supply Defined
New Markets
2-2
Basics of Market Economy
• Markets consist of buyers and sellers.
• Voluntary exchange of a product for
money.
– Product is a good or service.
• Price is rate at which exchange takes
place.
• Starbucks is an example of a market.
– Seller of coffee; but also buyer of coffee
beans and employee hours.
2-3
Local, National, and Global Markets
• Markets differ geographically.
• Local markets - buyers and sellers are
close to each other.
– Personal services are an example (e.g., dry
cleaning).
• National market - transactions across the
country.
– Stock transactions are an example.
2-4
Local, National, and Global Markets
• Global market - goods and services are sold
anywhere in the world.
– Oil is a product sold in the global market.
• Price of oil is determined by global supply and demand.
• The internet has transformed local markets into
national and global ones.
– As a result, more goods and services traded in
national market.
– Online auction market created by eBay has played a
major role.
2-5
Prices Defined
• The market price is defined as the typical
price at which goods and services are
exchanged in a market.
• Identifying the price is not always easy.
– Sale price: seller lowers typical price.
– Negotiated price:
• Set by bargaining between buyers and sellers.
• Differs from sticker price.
• Common in markets for big-ticket items such as
automobiles.
2-6
Prices Defined
• Often, prices are lowered for large, bulk
purchases (volume discount).
– Purchases at warehouse stores such as
Costco and Sam’s Club are examples.
• Purchases made ahead of their use result
in lower prices (advance purchase
discounts).
– Purchasing an airline ticket is an example.
2-7
Demand Defined
• Quantity demanded is the amount of a
good or service the buyer is willing to
purchase.
• The quantity demanded for a good or
service varies with the price.
• A demand schedule is the relation
between the quantity demanded and the
selling price.
2-8
Demand Defined
• Demand schedule is based on ceteris
paribus – all other things equal.
• Ceteris paribus assumes the factors
(other than price) that affect demand do
not change.
• These factors include consumer incomes
and taste, price of related goods, etc.
2-9
Demand Schedule for Music
Downloads
Price per song
(dollars)
$0.50
Quantity demanded
( no. of songs downloaded)
20
$1.00
10
$2.00
3
$3.00
1
$4.00
0
2-10
Law of Demand
• The law of demand states that there is an
inverse relation between quantity demanded and
price.
– As prices go up, people buy less, so quantity demand
goes down.
– As prices go down, people buy more, so quantity
demand goes up.
– A good example of the law of demand: the iPhone.
• Many goods allow unlimited consumption after
paying an initial fee.
– Examples include cell phone, cable plans and
broadband access.
2-11
Demand Curve
• The demand curve is the graphic
representation of the demand schedule.
– All the possible different prices are shown on
the vertical axis (y-axis).
– All the possible different quantity demands
are shown on the horizontal axis (x-axis).
• Demand curve is downward-sloping due to
law of demand.
2-12
Demand Curve for Coffee
$7.00
Demand
curve
$6.00
Price per cup
$5.00
$4.00
$3.00
A
$2.00
$1.00
$0.00
3
6
9
12
15
18
Quantity demanded (cups per week)
2-13
Supply Defined
• Quantity supplied is the amount of a good or
service that the seller is willing to produce at
various prices.
– Quantity supplied for a good or service varies with
price.
• A supply schedule is the relation between
quantity supplied and the selling price.
• Supply schedule is again based on ceteris
paribus conditions.
2-14
Supply Schedule for Haircuts
Price per haircut
(dollars)
Quantity supplied
( no. of haircuts available)
$5.00
40
$10.00
60
$15.00
80
$20.00
100
$25.00
120
$30.00
140
$35.00
160
2-15
Law of Supply
• The law of supply states that there is a direct
relation between quantity supplied and price.
– As prices go up, businesses have an incentive to
produce more, so quantity supplied goes up.
– If prices go down, businesses produce less, so
quantity supplied goes down.
• Labor market is a good example of the law of
supply.
– Price of labor is the wage rate.
2-16
Supply Curve
• The supply curve is the graphic
representation of the supply schedule.
– All the possible different prices are shown on
the vertical axis (y-axis).
– All the possible different quantity supplies are
shown on the horizontal axis (x-axis).
• Supply curve is upward-sloping due to law
of supply.
2-17
Supply Curve for Lawn Mowing
$25.00
Price per lawn mowed
Supply curve
$20.00
$15.00
A
$10.00
$5.00
$0
5
10
15
20
25
Quantity supplied (lawns mowed per week)
30
35
40
2-18
New Markets
• Demand and supply schedules describe
behavior in existing markets.
• New markets - created due to technology and to
meet changing needs of consumers.
• New products - include iPod, Amazon.com,
iPhone, etc.
• One major advantage of the market-based
economy is an ability to adjust to changes in
consumer demand and technological advances.
2-19