A Review of Marketing

1. A Review of Marketing

2. What is Marketing? • Marketing is much more than advertising and selling • For individual organizations, marketing is as all decisions and activities involved in getting and keeping customers • Comparative Advantage: The Basis for Exchange

3. Comparative Advantage: The Basis for Exchange • Land of shirts and pants - David and Hugo • David spends all his day making pants - 6 pairs a day • David spends all his day making shirts - 6 pairs a day • Hugo spends all his day making pants - 6 pairs a day • Hugo spends all his day making shirts - 10 pairs a day

4. Comparative Advantage: The Basis for Exchange • Hugo has absolute advantage in shirt production (10/6) • Neither person has absolute advantage in pants production (6/6) • Comparative Advantage for pants • David - ratio of pants to shirts = (6/6) = 1.0 • Hugo - ratio of pants to shirts = (6/10) = 0.6 • David has relative, or comparative, advantage in pants production • Comparative Advantage for shirts • David -ratio of shirts to pants = (6/6) = 1.0 • Hugo - ratio of shirts to pants = (10/6) = 1.6

5. Comparative Advantage: The Basis for Exchange • When Comparative Advantagesin production exist, total production will be higher if everyone specializes in their areas of comparative advantage. • E.g. If Hugo and David each spend half their time on pants and half on shirts, and can produce half the goods in half the time, they will produce: Shirts Pants David’s production 3 3 Hugo’s production 53 Total Production 8 6

6. Comparative Advantage: The Basis for Exchange • If Hugo and David completely specialize in their area of comparative advantage, they will produce: Shirts Pants David’s production 0 6 Hugo’s production 100 Total Production (+2) 10 6

7. Comparative Advantage: The Basis for Exchange • But Hugo has no pants!! • To realize higher production and still be fully clothed, they need to exchange shirts for pants. • The terms of trade must be mutually beneficial to motivate both David and Hugo to participate. E.g. if the exchange rate is set at 3 pairs of pants for 3 shirts David starts with 6 pairs of pants David trades 3 pairs of pants for 3 shirts David finishes with 3 pairs of pants and 3 shirts Hugo starts with 10 shirts Hugo trades 3 shirt for 3 pairs of pants Hugo finishes with 7 shirts and 3 pairs of pants Why incur cost of trading?

8. Comparative Advantage: The Basis for Exchange David starts with 6 pairs of pants David trades 3 pairs of pants for 5 shirts David finishes with 3 pairs of pants and 5 shirts Hugo starts with 10 shirts Hugo trades 5 shirts for 3 pairs of pants Hugo finishes with 5 shirts and 3 pairs of pants • Change exchange rate to facilitate trade • Half the shirts are traded for half the pants - 5 shirts for 3 pairs of pants Why incur cost of trading? • We can expect this market to move to an exchange rate somewhere around 4 shirts for 3 pairs of pants • That exchange rate will produce: Hugo starts with 10 shirts Hugo trades 4 shirts for 3 pairs of pants Hugo finishes with 6 shirts and 3 pairs of pants David starts with 6 pairs of pants David trades 3 pairs of pants for 4 shirts David finishes with 3 pairs of pants and 4 shirts Both David and Hugo end up with one shirt more than they would have it they worked alone.

9. Principles of Economics Illustrated • Comparative advantage in production motivates specialized production (to achieve higher total production). • Specialized production results in “discrepancies of assortment” which must be resolved through trade. • The exchange rate in trade must benefit all parties to motivate participation

10. Barriers to Trade • Comparative advantage lays a foundation for economic exchange but it does not guarantee trade (even if the proper exchange rate is set). • Hugo and David might refuse to trade for social, moral, or political reasons. • International Business - Tariffs, quotas, embargoes • Even if Hugo and David are willing to trade, the costs of trade may exceed the benefits. If the costs of trading exceed the value of two shirts, Hugo will not trade.

11. Sources of Trading Costs • Trading costs stem from various “market making” activities that are needed to arrange and complete economic transactions. • Communication • Negotiation • Transportation • Storage