The Market system

1. The Market system Christopher Quintana & Rachel Rivero

2. Concepts • Market: Institution or mechanism that brings together buyers and sellers, of particular goods & services.(Demanders and suppliers) • Demand: Schedule or curve, that shows the various amounts of product that consumers are willing and able to purchase at each of a series of possible prices during a specific period of time.

3. Demand Diagram

4. Concepts • Demand schedule: Hypothetical demand “schedule” for a certain product.

5. Concepts • Law Of Demand: All else equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls. • Law of Supply: As price rises, the quantity supplied rises; as price falls, the quantity supplied falls.

7. Concepts • Diminishing Marginal Utility: In any specific time period each buyer of a product will derive less satisfaction from each unit of the product consumed. The second will yield less than the first, the third less than the second and so on. Consumers will only buy more units if the price of those units is progressively reduced.

8. Concepts • Income Effect: Indicates that a lower price increases the purchasing power of a buyers income, enabling the buyer to purchase more of the product that he or she could buy before. • Substitution effect: At a lower price, buyers have the incentive to substitute what is now a less expensive product for a similar product that are relatively more expensive.

9. Concepts • Determinants of Demand: Factors that would affect demand. (Aside from price) • Changes in demand are caused by: • Tastes • Number of consumers in the market • Consumer Income • Prices of related goods • Consumer expectations about future prices and incomes.

10. Concepts • Normal goods: Products that vary directly with money income. • Inferior goods: Products that vary inversely with money. (Used, or thrift items) • Complementary goods: Good that is used with another good.

11. Determinants of Supply: Factors that would alter the amount supplied of a good. • Resource Prices • Technology • Taxes and Subsidies • Prices of other goods • Price Expectations • Number of sellers in the market

12. Concepts • Surplus: Excess of quantity supplied over quantity demanded. • Shortage: Excess demand and not even supply.

13. Concepts • Equilibrium price: With no shortage or surplus there is no reason for the market price to change, thus it is the Equilibrium price • Equilibrium Quantity: When quantity supplied, and quantity demanded are in balance.

14. Concepts • Rationing function of prices: Ability of the competitive forces of supply and demand to establish a price at which selling and buying decisions are consistent. • Price ceiling: Sets maximum legal price a seller may charge for a product or service. (Enables consumers to obtain essential goods or services that they could not afford at equilibrium price) • Price Floor: Minimum price fixed by the Government. (Placed when society feels the market has not provided sufficient income for suppliers and producers.

15. THE MARKET SYSTEM - CONCEPTS • Private Property: Enables individuals and businesses to obtain, use, and dispose of property resources as they see fit. • Freedom of Enterprise: Ensures that entrepreneurs and private businesses are free to obtain and use economic resources to produce their choice of goods and services and to sell them in their chosen markets.

16. Concepts • Freedom of Choice: Enables owners to employ or dispose of their property and money as they see fit. It also allows workers to enter any line of work for which they are qualified.It also ensures that consumers are free to buy the goods and services that best satisfy their wants.

17. Concepts • Self-Interest: The motivating force of all various economic units as they express their free choices. • Competition: Independently acting sellers and buyers operating in a particular market. 2. Freedom of sellers and buyers to enter or leave markets on the basis of economic self interest.

18. Concepts • Roundabout Production: “Roundaboutness”, or roundabout methods of production, is the term used to describe the process whereby capital goods are produced first and then, with the help of the capital goods, the desired consumer goods are produced. • Specialization: Majority of consumers produce virtually none of the goods and services they consume, and they consume little or nothing of what they produce.

19. Concepts • Division of Labor: Contributes to society’s output in several ways. • Specialization: Makes use of differences in ability. • Specialization fosters learning by doing: By devoting time into a single task, you are more likely to develop the skills it requires than you would if you worked in a number of different tasks. • Specialization saves time: By devoting time to a single task, you avoid the loss of time brought by shifting from one job to another.

20. Concepts • Four Fundamental Questions: • What goods and services will be produced? • How will the goods and services be produced? • Who will get the goods and services? • How will the system accommodate change?

21. Concepts • Adam Smith = Writer of The Wealth of Nations.

22. Concepts • Invisible Hand: Firm and resource suppliers seeking to further their own self interest and operating within the framework of a highly competitive market system will simultaneously as though guided by an invisible hand will promote the public or social interest.

23. Concepts • Virtues of the Market System: • Efficiency: Promotes the efficient use of resources by guiding them into the production of the goods and services most wanted by society. Forces the use of the most efficient techniques in organizing resources for production and encourages the development and adoption of new and more efficient production techniques.

24. Concepts • Incentives: The market system encourages skill acquisition, hard work and innovation. Greater work skills and effort mean greater production in higher incomes which usually translate into a higher standard of living.

25. Concepts • Freedom: The major non-economic argument for the market system is its emphasis on personal freedom. The market system coordinates economic activity without coercion. The market permits and thrives on freedom of enterprise and choice. Entrepreneurs and workers are free to further their own self-interest subject to the rewards and penalties put in place by the market system itself.

26. Individual Demand Demand Can Increase or Decrease P 6 5 4 3 2 1 0 Change in Demand Individual Demand P Qd Change in Quantity Demanded $5 4 3 2 1 10 20 35 55 80 Price (per bushel) D2 D1 Decrease in Demand D3 Q 2 4 6 8 10 12 14 16 18 Quantity Demanded (bushels per week) 3-26

27. Individual Supply Supply Can Increase or Decrease P 6 5 4 3 2 1 0 S3 Individual Supply S1 Change in Quantity Supplied S2 P Qs $5 4 3 2 1 60 50 35 20 5 Price (per bushel) Change in Supply Q 10 20 30 40 50 60 70 Quantity Supplied (bushels per week) 3-27

28. Market Equilibrium 200 Buyers & 200 Sellers Market Supply 200 Sellers Market Demand 200 Buyers 6 5 4 3 2 1 0 6,000 Bushel Surplus S P Qd P Qs $4 Price Floor $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 Price (per bushel) 3 $2 Price Ceiling 7,000 Bushel Shortage D 7 2 4 6 8 10 12 14 16 18 Bushels of Corn (thousands per week) 3-28

29. Example 1. Demand Supply for Wheat What is the equilibrium price? Fill in the shortages and surplus column Why is $3.40 not the equilibrium price? $4.60?

30. Answers The equilibrium price is $4.00 On chart $3.40 cannot be the equilibrium price because there is a shortage of wheat, and $4.60 cannot be he equilibrium price because then there is a surplus of bushels.

31. Real Life Example: Selling Cookies Let’s say I’m going to start selling chocolate chip cookies. My beginning price is $0.25. Sales are okay, but there is more supply than demand for my cookies. Competition causes me to increase prices to $0.50. Demand begins to increase as well, so I decide to add 25 cents ($0.75). Naturally I see profit so I raise my price to $1.00 a cookie. Demand begins to decrease as competitors lower their price. Why?