1. Theoretical Foundations: Prices, Markets, and Management
Chapter 2
Theoretical Foundations: Prices, Markets, and Management

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

4. Laissez Faire Capitalism
Ownership of Resources
Markets
Government Involvement

5. Modern Mixed Economy Ownership of Resources Markets
Government Involvement

6. Democratic Socialism Ownership of Resources Markets
Government Involvement

7. Communism
Ownership of Resources
Markets
Government Involvement

8. 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

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

10. 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

11. An Individual’s Demand for Beer

12. 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

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

14. 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

15. Hypothetical Firm Supply Curve

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

17. Factors Affecting Supply
Resource Prices
Labor Costs
Taxes
Subsidies
Technology

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

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

20. Hypothetical Firm’s Marginal Cost Curve

21. S Curve for Firm is MC CurveD P1 MC Q1

22. Price and Quantity Determination in a Competitive MarketplaceS P’ E PE P’ S D QE
Quantity

23. 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.

24. Shift in Demand for ShoesP P1
What happened here? P0 D1 D0 S Q0 Q1 Q

25. Shift in Supply of ShoesD P S P1
What happened here? P0 D S Q1 Q0 Q

26. Effect of Price ControlsD S P
International
Market
Price
Controlled Maximum
Price S D QS QD
Quantity of Oil

27. 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

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

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

30. Food Distribution in Chicago
How does it happen?

31. 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

32. Environmental Analysis and Forecasting
Environmental analysis and forecasting provides much of the information needed to integrate changes in the external environment into the business planning process.
There are 6 steps to integrating these changes

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

34. Step I - Define Areas
I. Define area of corporate involvement with the external environment.
Primary relationships are those relationships between the business and the societal elements, such as suppliers, customers, employees, labor unions and stock holders.
Secondary relationships are those relationships between the business and area such as; the products used by the customers, pollution, hazards to workers, and the impact of company employment practices on the labor market.

35. 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

36. Step II - Delineate Topics
External Topics
Internal Topics
II. Delineate external and internal topics and subtopics to be monitored
External topics include demographics, values and lifestyles, technology, public attitude, government, economy and the international scene.
Internal topics include sales, corporate income, capital expenditures and facilities.

37. Step III - Determine Time Frame and Forecasting Requirements
Short Range
Long Range
Delphi Technique
Scenario Method
III. Determine the time frame and forecasting requirements for the scanning effort.
If Short range then minimal requirements may be necessary, if long range, then there are two different techniques that can be used.
Delphi Technique is used by selecting and expert panel who respond to mailed questionnaires, which address topics of concern of the business. These questionnaires are repeatedly sent out until a general consensus has been reached.
Scenario Method is when there are one or more scenarios designed for the product, business plans are then developed for each scenario and managers choose the scenario which best seems to suit the product.

38. Step IV - Design and Implement Strategy
External/Short-term
External/Long-term
Internal/Short-term
Internal/Long-term
IV. Design and implement a strategy to gather relevant information on the identified topics for the time frame chosen.
External/short-term - focus on suppliers, customers, and other important contacts outside the organization
External/ Long Term – focus on Delphi panelists and other experts, and use economic forecasting for the long term
Internal /short term – focus on employees, get their advice on policies and products of the company as well as their own expectations, also conduct market research to focus on the potential acceptance of new customers to new product lines.
Internal/ long term – focus on Strategic planning documents, financial planning reports and human resource plans.

39. Step V - Analyze Data Cross Impact Analysis
Analyze the data for use by management
Cross impact analysis is a technique used to determine interrelationships of the external issues among themselves as well as the relationship to the internal issues. It is used to predict the probable impact one event may have on another.
Example
Three television technologies are examined
Interactive
Digital
HDTV increase/decrease in the adoption of the technology
Above the diagonal – the effect if the earlier row event occurs is indicated
Below the diagonal – the effect if the earlier column event does not occur is indicated

40. Step VI - Integrate into the Organization
Short-term
Long-term
Organizational Change
Inform Top Management
Integrate the scanning process into the organization
In the short term integration is not essential
In the long run in order to facilitate the process, some structural change in the organization may be appropriate. As the effort grows it may be necessary to hire a staff professional to the project and perhaps even a team. In addition to these changes it may be necessary to show top management the usefulness and importance of environmental scanning, allowing general management awareness of key factors in the external environment to be increased.

41. 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

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

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