1. 1 Buyers and Sellers Determine Prices

2. 2 Goals of Buyers and Sellers BUYERS Make a transaction Zero price SELLERS Infinite Price Make a transaction

3. 3 The Process of Price Determination

4. 4 COMPETITION IS THE REGULATOR It constrains buyers and sellers.

5. 5 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.”

6. 6 Buyers want the lowest possible price, but.... For Sale DEMAND Price Quantity

7. 7 they have to compete against all other buyers. For Sale Price Quantity

8. 8 Sellers want to charge the highest price possible, but...... For Sale Price Quantity Supply

9. 9 they have to compete against all other sellers. For Sale Price Quantity Supply

10. 10 Competition determines the Equilibrium Price For Sale SUPPL Y Demand Price Quantity

11. 11 How are prices determined? Buyers competing against each other drive the price up Sellers competing against each other drive the price down Equilibrium Price is determined by the impersonal forces of supply and demand

12. 12 About the buyers

13. 13 Influences on the sellers

14. 14 Reservation Prices Sellers –Supply price –The lowest price that a seller is willing and able to accept for a particular quantity of a particular product Buyers –Demand price –The highest price that a buyer is willing and able to pay for a particular quantity of a particular product

15. 15 At the equilibrium price Buyers who are able and willing to pay the price get the goods and services they desire Sellers who are able to produce at that price sell all that they wish There are neither surpluses nor shortages Not all prospective buyers or sellers are satisfied

16. 16 Relative Prices $20 $10 $40 Income = $30,000

17. 17 Relative Prices Have Not Changed $20 $10 $40 Income = $30,000 Income = $60,000 $20 $40 $80

18. 18 Supply – a relationship PriceQuantity Supplied $105 $94 $83 $72 $61 $50 $40 $30 $20 $10

19. 19 The Law of Supply Once 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.

20. 20 Demand – a relationship PriceQuantity Demanded $100 $90 $81 $72 $63 $54 $45 $36 $27 $18

21. 21 The Law of Demand Once 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.

22. 22 Price Elasticity of Demand Measure of the strength of buyers’ reactions to price changes If buyers don’t react very strongly, inelastic If buyers react strongly, elastic

23. 23 Determinants of Price Elasticity of Demand availability of substitutes percentage of income time

24. 24 Price Elasticity of Supply Strength of seller’s response to price change Determinants –time –use of easily transferable resources –divisibility of inputs.

25. 25 Equilibrium Price and Quantity Exchanged PriceQuantity Supplied Quantity Demanded $1050 $940 $831 $722 $613 $504 $405 $306 $207 $108

26. 26 The Equilibrium Price Quantity supplied equals quantity demanded No shortages or surpluses The market clears Scarcity is not eliminated The measure of relative scarcity

27. Some questions How tall are you? Feet and inches How much do you weigh? Pounds How far is LA from here? Miles What is the temperature? Degrees What is the humidity? % How scarce is the coffee you just bought? Dollars and cents

28. Price – A Unit of Measurement Scarcity is a general concept about our goals and resources Relative 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.

29. Relative Scarcity What 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)

30. Relative Scarcity The 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.

31. Relative Scarcity An 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 scarcity Workers with low human capital are in low demand and high supply; their wage will be low reflecting their low scarcity.

32. 32 Relative Price: unit by which we measure relative scarcity (Units on the Scarcometer)

33. How scarce are these? Fighting Uncle Sam Rubber Ducky Econ Ruler

34. 34 Order these products in terms of relative scarcity (7 being most scarce, 1 being least scarce)  yacht  candy bar  dinner for one at MacDonalds  a nice dinner for two in LA  laptop computer  Toyota mini truck  ticket to a world series game

35. 35 Main Points The 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.

36. 36 Main Points The 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.

37. 37 Main Points Price 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.

38. 38 Main Points Price elasticity of supply is the measure of the strength of seller’s response to a price change The determinants of price elasticity of supply are time, use of easily transferable resources, and divisibility of inputs.

39. 39 Main Points Buyers 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