An Introduction to Product Markets

1. An Introduction to Product Markets

2. What is a Market? • Institution or mechanism that brings together buyers and sellers • Common element is goods or services are traded • Geography, size, or familiarity doesn’t matter • Local, national, or international • Millions of participants or two people • Friends or anonymous • People you never meet

3. Examples of Markets • Farmer’s roadside stand • Retail stores like Starbucks, Blockbuster Video, Macy’s, Home Depot, Betty’s Hair Salon and Nike Shoes • New York Stock Exchange

4. Markets Determine What Will Be Produced by Establishing Prices • If no one buys the shoes I’m selling, I will lower price and not produce any more • No one else will start producing shoes given my lack of success in selling them • If everyone wants my shoes, and I don’t have enough to sell to them, I will raise the price and start producing more shoes • Other firms will start producing shoes given my success in getting money for them

5. Markets Determine How Much Will Be Produced by Establishing Price • Firms will produce shoes only if they can make a profit • To make a profit, the price of the shoes must cover the cost of producing them • A firm will not produce shoes if the price is less than what it costs to make them • A firm will produce lots of shoes if the price is more than what it costs to make them

6. Markets Determine Who Gets the Goods by Establishing Prices • People that can’t afford and don’t want the shoes won’t get them • People that can afford and want the shoes will get them

7. Shoes are Bought and Sold in Product Markets Product markets bring together buyers and sellers of shoes (or other goods or services) • People want to buy shoes: they demand shoes if they are willing and able to pay for them • Firms want to sell shoes: they supply shoes if the firm is able and willing to produce them (price covers the cost of production)

8. Money Helps Exchange • Shoes are traded for dollars • Shoes have a dollar price • Individuals pay firms dollars for shoes • Money is a medium of exchange: it helps consumers get goods by facilitating trade

9. Money Helps Markets Function Smoothly • Barter would exist without money • Barter is exchanging goods for goods • Without money individuals would have to trade shoes for other products (like food) • Individuals selling food might want clothes, not shoes • A three-way trade would have to occur • Money makes it easier for individuals to get the goods they want

10. Market Forces Operate through Competition • If people cannot get shoes, they will compete against other consumers to get them by bidding up the price • As the price goes up, firms will start to produce more shoes • If firms cannot sell all the shoes it made, it will compete with other firms for individuals to buy the shoes by lowering the price • As the price goes down, more people will buy the shoes