Buyers and Sellers Determine Prices

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Buyers and Sellers Determine Prices. BUYERS Make a transaction Zero price. SELLERS Infinite Price Make a transaction. Goals of Buyers and Sellers. The Process of Price Determination. COMPETITION IS THE REGULATOR. It constrains buyers and sellers. . Competition is the Regulator. - PowerPoint PPT Presentation

Transcript of Buyers and Sellers Determine Prices

  • *Buyers and Sellers Determine Prices

  • *Goals of Buyers and SellersBUYERS

    Make a transaction

    Zero priceSELLERS

    Infinite Price

    Make a transaction

  • *The Process of Price Determination

  • *COMPETITION IS THE REGULATOR

    It constrains buyers and sellers.

  • *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.

  • *Buyers want the lowest possible price, but....DEMAND

  • *they have to compete against all other buyers.

  • *Sellers want to charge the highest price possible, but ...... Supply

  • *they have to compete against all other sellers. Supply

  • *Competition determines the Equilibrium PriceSUPPLYDemand

  • *How are prices determined?Buyers competing against each other drive the price upSellers competing against each other drive the price downEquilibrium Price is determined by the impersonal forces of supply and demand

  • *About the buyers

  • *Influences on the sellers

  • *Reservation PricesSellers Supply priceThe lowest price that a seller is willing and able to accept for a particular quantity of a particular productBuyersDemand priceThe highest price that a buyer is willing and able to pay for a particular quantity of a particular product

  • *At the equilibrium priceBuyers who are able and willing to pay the price get the goods and services they desireSellers who are able to produce at that price sell all that they wishThere are neither surpluses nor shortagesNot all prospective buyers or sellers are satisfied

  • *Relative Prices$20$10$40Income = $30,000

  • *Relative Prices Have Not Changed$20$10$40Income = $30,000Income = $60,000$20$40$80

  • *Supply a relationship

    PriceQuantity Supplied$105$94$83$72$61$50$40$30$20$10

  • *The Law of SupplyOnce 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.

  • *Demand a relationship

    PriceQuantity Demanded$100$90$81$72$63$54$45$36$27$18

  • *The Law of DemandOnce 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.

  • *Price Elasticity of DemandMeasure of the strength of buyers reactions to price changesIf buyers dont react very strongly, inelasticIf buyers react strongly, elastic

  • *Determinants of Price Elasticity of Demandavailability of substitutespercentage of income time

  • *Price Elasticity of SupplyStrength of sellers response to price changeDeterminantstimeuse of easily transferable resourcesdivisibility of inputs.

  • *Equilibrium Price and Quantity Exchanged

    PriceQuantity SuppliedQuantity Demanded$1050$940$831$722$613$504$405$306$207$108

  • *The Equilibrium PriceQuantity supplied equals quantity demandedNo shortages or surplusesThe market clearsScarcity is not eliminatedThe measure of relative scarcity

  • Some questionsHow tall are you? Feet and inchesHow much do you weigh? PoundsHow far is LA from here? MilesWhat is the temperature? Degrees What is the humidity? %How scarce is the coffee you just bought? Dollars and cents

  • Price A Unit of MeasurementScarcity is a general concept about our goals and resourcesRelative scarcity, as indicated by the price of a particular resource, good, or service is indicates HOW scarce that particular resource, good or service is compared to all others.

  • Relative ScarcityWhat determines the price of footballs?What determines the price of cashmere sweaters?What determines the price of music downloads?What determines the price of Ipods?The answer to all of these questions is: buyers and sellers (Demand and Supply)

  • Relative ScarcityThe relationship between supply and demand for footballs is different than the relationship for cashmere sweaters or music downloads or IPods. The price of any particular product is the indication of the relationship between demand and supply for one product compared to all others. The relative price is the unit by which the market measures HOW scarce one item is compared to all others.

  • Relative ScarcityAn item with high supply and low demand is not very scarce; its price will be low reflecting the low scarcity.An item with low supply and high demand is very scarce; its price will be high reflecting the high scarcityWorkers with low human capital are in low demand and high supply; their wage will be low reflecting their low scarcity.

  • *Relative Price: unit by which we measure relative scarcity (Units on the Scarcometer)

  • How scarce are these?Fighting Uncle SamRubber DuckyEcon Ruler

  • *Order these products in terms of relative scarcity (7 being most scarce, 1 being least scarce)yacht candy bardinner for one at MacDonalds a nice dinner for two in LA laptop computer Toyota mini truck ticket to a world series game

  • *Main PointsThe 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.

  • *Main PointsThe 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.

  • *Main PointsPrice 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.

  • *Main PointsPrice elasticity of supply is the measure of the strength of sellers response to a price changeThe determinants of price elasticity of supply are time, use of easily transferable resources, and divisibility of inputs.

  • *Main PointsBuyers 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 for one product compared to that relationship for all others. Relative price is the measure of relative scarcity

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