Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 1 Chapter 4 Allocation and the Market System

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 2 Learning Objectives Show how the market system determines what is to be produced. Examine how markets organise production. Discuss how markets distribute output. Illustrate how markets accommodate change. Evaluate the operation of the market economy.

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 3 Operation of the Market System What is to be produced? Determined by competing buyers and sellers in both resource and product markets

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 4 Types and Quantities of Goods Produced Determined by the motives of firms to seek profits and avoid losses Firms will produce those goods and services that result in a profit

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 5 Profits (or Losses) Determined by: Total revenue received by the firm from the sale of a product; and Total costs of producing that product

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 6 Economic Costs and Profits Economic costs: Payments made to obtain and retain the services of a resource, including land, labour, capital and entrepreneurial ability Normal profits: the minimum cost payment that is just sufficient to obtain and retain contribution by the entrepreneur

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 7 Economic Profit The total revenue of a firm less all its economic costs (including the cost of entrepreneurial ability) Also known as pure profit Zero economic profit = normal profit

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 8 Profits and Expanding Industries Economic profits induce new firms to enter the industry, resulting in an expanding industry Entry of new firms increases the market supply of the product, resulting in lower prices until normal profits are restored

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 9 Losses and Declining Industries Below-normal profit induces firms to leave the industry, resulting in a declining industry As firms exit, supply decreases, and prices increase until normal profits are restored

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 10 Dollar Votes Consumer demand determines the types and quantities of product produced Ultimately determines whether industries contract or expand Consumers register their ‘dollar votes’ through the demand side of the product market

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 11 Derived Demand The demand for resources is a derived demand Demand for resources is ultimately determined by the demand for the goods and services that the resources help produce

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 12 Organising Production Organising production in a market economy involves: – Resource allocation among specific industries – Choosing specific firms to be involved in production – Deciding what technology the firm should employ

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 13 Efficient Production The specific firms remaining in an industry are those employing the most efficient techniques Involves combining resources in the least-cost production method

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 14 Least-Cost Production The combination of resources which results in the lowest dollar-and-cents amount of cost Various techniques result in the employment of varying quantities of resources and differing costs

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 15 Distributing Total Output Willingness and ability of consumers at the existing market price Ability determined by income Willingness determined by individual preferences

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 16 Accommodating Change Changes in consumer preferences, technology and resource supplies Market systems adapt through the guiding functions of prices Price signals generated by changes in demand Redirections of resources occur

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 17 Initiating Progress Competitive markets provide incentives for technological advances—lower production costs and economic profits Technological advances lead to capital accumulation

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 18 Competition and Control Competition is the mechanism of control in a market-oriented system Forces business and resource suppliers to respond to the wishes of consumers Invisible hand: firms and resource suppliers, through competition, are guided to promote the public interest

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 19 A Preliminary Evaluation of the Market System A case for the market system – allocative efficiency – freedom of enterprise and choice A case against the market system – demise of competition – unequal income distribution – market failure and government intervention: spillovers or externalities

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 20 Next Chapter: Organisation of Business in Australia