Chapter 2 Theoretical Foundations: Prices, Markets, and Management

Types of Economic Systems Laissez Faire Capitalism Modern Mixed Economy Democratic Socialism Communism

Laissez Faire Capitalism Ownership of Resources Markets Government Involvement

Modern Mixed Economy Ownership of Resources Markets Government Involvement

Democratic Socialism Ownership of Resources Markets Government Involvement

Communism Ownership of Resources Markets Government Involvement

The Concept of Demand Demand is a Schedule of the different quantities of a good or service that a consumer is Willing and Able to purchase at each and every possible price

Determinants of Demand What are some determinants of the demand for a good or service?

Determinants of Demand Income – Normal Goods and Services – Inferior Goods and Services Price Price of Substitute Goods and Services Price of Complementary Goods and Services Attitudes and Tastes

An Individual’s Demand for Beer

The Law of Demand The lower the price, the more of a good or service that will be purchased, the higher the price, the less that will be bought

Market Demand Curve Summation of all individual demand curves in the market Law of Demand Downward Sloping Determinants of Demand

Supply Supply is a schedule of the different quantities of a good or service that a seller is ready and willing to sell at each and every possible price

Hypothetical Firm Supply Curve

Factors Affecting Supply What factors affect the supply of a good or service?

Factors Affecting Supply Resource Prices Labor Costs Taxes Subsidies Technology

Market Supply vs. Firm Where do we get “S” curve? – Summation of supply curves for each “firm” in “market” or “industry” Q firm 1 P firm 1 S firm 1 Q firm 2 P firm 2 S firm 2 Q P S market

Marginal Cost The additional or extra cost incurred in producing one more unit of a good or service MC =  TC/  Q

Hypothetical Firm’s Marginal Cost Curve

P1P1 Q1Q1 D MC S Curve for Firm is MC Curve

Price and Quantity Determination in a Competitive Marketplace D D S S Quantity Price E P’ P’ PEPEPEPE QEQEQEQE

Role of Prices In a Free Enterprise System (I) Transmits Information... – To producers, consumers, resource suppliers, labor – Signals to produce more or less, to enter new markets, produce new products, etc.

Shift in Demand for Shoes D0D0D0D0 S S P1P1P1P1 P0P0P0P0 Q0Q0Q0Q0 Q P What happened here? Q1Q1Q1Q1 D0D0D0D0 D1D1D1D1 D1D1D1D1

Shift in Supply of Shoes D D S S P1P1P1P1 P0P0P0P0 Q0Q0Q0Q0 Q P S’ What happened here? Q1Q1Q1Q1

Effect of Price Controls S S Quantity of Oil QSQSQSQS D D QDQDQDQD Controlled Maximum Price International Market Price P

Role of Prices (II) Provides Incentives... to consumers, producers, labor and owners of productive resources Allocate Resources... alternative ways to provide goods and services Affect Distribution of Income

Two Goals of Society Increase Incomes and Living Standards Fairness and Equity in Income Distribution Two Goals in Conflict

Conflict Between Goals Income Distribution Over Time Poor Vs. Rich or Impact on Income over Lifetime

Food Distribution in Chicago How does it happen?

The Invisible Hand of the Marketplace Adam Smith, “Wealth of Nations” Individuals pursue their own self interest... greater good of society is served Individuals moved by an “Invisible Hand” to promote social welfare Example: Food distribution

Environmental Analysis and Forecasting

Analyzing and Forecasting Environmental Change Describing the Current Environment Projecting Future Changes Environmental Scanning

Step I - Define Areas

Define Areas to Study Primary Involvement - Exchange relationships or marketplace relationships Secondary Involvement -Relationships, activities and impacts that are ancillary or consequential to primary involvement

Step II - Delineate Topics External Topics Internal Topics

Step III - Determine Time Frame and Forecasting Requirements Short Range Long Range – Delphi Technique – Scenario Method

Step IV - Design and Implement Strategy External/Short-term External/Long-term Internal/Short-term Internal/Long-term

Step V - Analyze Data Cross Impact Analysis

Step VI - Integrate into the Organization Short-term Long-term – Organizational Change – Inform Top Management

Poland Case Problems of a Socialistic System Everybody has money Too much money chasing too few goods Money becomes worthless Resort to barter Long lines for food

Poland Case Why did they have long lines? How does food distribution under Communism compare to the system in the USA?

Poland Case How well can government controls replace the free enterprise system? What is happening in Poland today?