Key Terms
• Competitive markets
• Market Power
• Price discrimination
Lesson Objectives
1. Why do movie theaters charge different people different prices for tickets, but charge everyone the same price for popcorn?
2. Suppose that five major oil-producing nations of the world get together and, with the goal of increasing revenue and profit, agree to cooperate in such a way as to act as if they were a single supplier.
What actions could they take to achieve their goal?
Consider each action on the list individually. What is the likely impact on the price of oil? Why?
What is the likely result in terms of the revenues of oil producers?
Consider each action on the list individually. Are the benefits and costs of each action the same for all producers?
What is the incentive for individual producers to abide by any agreement?
What is the incentive for individual producers to cheat on any agreement?
What would be necessary in order to maintain (enforce) the agreements?
What do you predict will happen in the long run?
Lesson Overview
In competitive markets, price increases caused by changes in either supply or demand are the result of increases in marginal costs; prices and marginal costs are directly related.
o The higher prices which accompany increased demand indicate buyers' willingness to bear higher opportunity costs in order to purchase particular goods and services.
o The higher prices which accompany decreased supply indicate the higher opportunity costs producers must bear (because of higher prices for resources or the existence of other, more profitable, production alternatives) in order to provide particular goods and services.
The term "market power" refers to the influence that any particular buyer or seller can exercise over the price of a product. Market structures range from highly competitive, in which there are so many buyers or sellers that none can influence the market price, to the other extreme in which a single buyer or seller faces no competition and therefore wields great market power.
o In markets characterized by free entry, attempts by sellers of products or resources to raise prices in the absence of cost increases are generally unsuccessful.
o Similarly, in markets characterized by free entry, attempts by buyers of products or resources to lower prices in the absence of cost decreases are generally unsuccessful.
The persistence of large differences between price and production cost usually indicates that entry is restricted.
o This may be the result of limited availability of specialized resources or of government restriction to entry.
o Government intervention in response to a special interest group often results in reduced competition and the creation of market power for that group.
o Because the costs imposed on consumers by the government response to any particular lobbying effort are diffuse and individually small, consumers generally do not organize to oppose the influence of the special interest groups. The benefits to the special interest groups are large enough to give them an incentive to organize and lobby.
Price discrimination, charging different people different prices for the same good, is possible because individuals place different subjective values on goods.
o Price discrimination is most likely to occur when the seller can identify groups of buyers who place different relative values on a good or service and when resale of the item among customers is either impossible or highly unlikely.
o Pricing of airline and theater tickets are good examples of price discrimination.
Definitions
Competitive markets - Markets characterized by relative ease of entry and exit and by large numbers of sellers who provide products which consumers regard as substitutes for one another.
Market power - The degree to which a business firm is able to earn larger than normal profits, market power is inversely related to both the degree of competition in the market and the ease of entry and exit.
Price discrimination - The practice of charging different groups of consumers different prices for the same good or service.
Sunday, August 3, 2008
Thursday, July 31, 2008
Markets
Key Terms
• Exchange
• Money prices
• Transaction costs
• Specialization
• Property rights
• Market-clearing price
• Interdependence
• Monetary costs
• Non-monetary costs
Lesson Objectives
1. Review the nature of voluntary exchange, drawing on the experiences in "Why People Trade."
o No one forced people to trade; why did they? (anticipation of benefit)
o Who benefited from each exchange? (mutual benefit)
o Why were some people able to trade more than others?
o What was the opportunity cost of the trade you made?
2. Define market - and discuss why they are our preferred method of rationing. (Relate to "Why People Trade" - was that a market? how so?)
o How do people behave in markets?
o Markets work as positive sum games when:
there are clearly defined "rules of the game;"
property rights are clearly established and are protected; and
there is freedom to exchange.
o How would our market have been different if we had used money?
3. Define incentives as both rewards and penalties for behavior.
o There are monetary and non-monetary incentives.
4. The role of prices in markets.
o Prices provide information.
o Prices act as a rationing mechanism.
o Prices are incentives - for buyers and sellers.
5. Prices play a crucial coordinating role in commercial societies; they provide incentives for buyers and sellers to act in ways that lessen the impact of scarcity.
o Reminder of law of demand from first lesson. How do buyers react to changing prices?
o Reminder of law of supply from first lesson. How do sellers react to changing prices?
Definitions
Exchange - Trade; voluntary agreements between buyers and sellers.
Market clearing price - The price at which all that suppliers are willing to sell equals all that buyers are willing to purchase; the price at which quantity demanded equals quantity supplied.
Non-monetary costs - See transaction costs.
Property rights - The conditions of ownership, including the rights and restrictions regarding use, ownership, and sale.
Specialization - Occurs when individuals, businesses, regions or nations concentrate on producing only those goods and services that they can best (most efficiently) produce, given their existing resources.
Transaction costs - The resources (like time and energy) that are used in making an exchange. Examples of transaction costs are time spent shopping or the time and energy necessary to negotiate a contract.
• Exchange
• Money prices
• Transaction costs
• Specialization
• Property rights
• Market-clearing price
• Interdependence
• Monetary costs
• Non-monetary costs
Lesson Objectives
1. Review the nature of voluntary exchange, drawing on the experiences in "Why People Trade."
o No one forced people to trade; why did they? (anticipation of benefit)
o Who benefited from each exchange? (mutual benefit)
o Why were some people able to trade more than others?
o What was the opportunity cost of the trade you made?
2. Define market - and discuss why they are our preferred method of rationing. (Relate to "Why People Trade" - was that a market? how so?)
o How do people behave in markets?
o Markets work as positive sum games when:
there are clearly defined "rules of the game;"
property rights are clearly established and are protected; and
there is freedom to exchange.
o How would our market have been different if we had used money?
3. Define incentives as both rewards and penalties for behavior.
o There are monetary and non-monetary incentives.
4. The role of prices in markets.
o Prices provide information.
o Prices act as a rationing mechanism.
o Prices are incentives - for buyers and sellers.
5. Prices play a crucial coordinating role in commercial societies; they provide incentives for buyers and sellers to act in ways that lessen the impact of scarcity.
o Reminder of law of demand from first lesson. How do buyers react to changing prices?
o Reminder of law of supply from first lesson. How do sellers react to changing prices?
Definitions
Exchange - Trade; voluntary agreements between buyers and sellers.
Market clearing price - The price at which all that suppliers are willing to sell equals all that buyers are willing to purchase; the price at which quantity demanded equals quantity supplied.
Non-monetary costs - See transaction costs.
Property rights - The conditions of ownership, including the rights and restrictions regarding use, ownership, and sale.
Specialization - Occurs when individuals, businesses, regions or nations concentrate on producing only those goods and services that they can best (most efficiently) produce, given their existing resources.
Transaction costs - The resources (like time and energy) that are used in making an exchange. Examples of transaction costs are time spent shopping or the time and energy necessary to negotiate a contract.
Scarcity and Choice
Key Terms
• Demand
• Supply
• Scarcity
• Trade-offs
• Opportunity Cost
• Marginal Costs/Benefits
Lesson Objectives
1. Define scarcity and give an example.
2. Establish causation: Scarcity necessitates choice; therefore trade-offs cannot be avoided.
o List and describe several methods of rationing.
3. Define opportunity cost.
o Differentiate between trade-off and opportunity cost: the cost is the "next-best" alternative.
4. Develop examples to illustrate the characteristics of cost.
o All costs lie in the future; the anticipation of future consequences shapes peoples' decisions.
o Emphasize that "consequence" and "opportunity cost" are different.
5. To the decision-maker, the relevant value of something is its marginal value.
o Define marginal as additional, or "a little more or a little less," or "the next unit."
Definitions
Demand - The relationship between prices and the corresponding quantities of goods or service buyers are willing to purchase at any given point in time.
Marginal benefit - The increase in total benefit that results from producing, purchasing, or consuming an additional unit.
Marginal cost - The increase in total cost that results from producing an additional unit.
Opportunity cost - The most highly valued sacrificed alternative; the value of the "next-best" choice.
Scarcity - Scarcity means that people cannot obtain as much of something as they want, without making a sacrifice or bearing a cost. Scarcity defines a relationship - between the amount of something we want and the amount that is available.
Supply - The relationship of prices to the quantities of a good or service sellers are willing to offer for sale, at any given point in time.
Trade-off - A choice between alternatives that reveals the opportunity cost of selecting one alternative over the other
• Demand
• Supply
• Scarcity
• Trade-offs
• Opportunity Cost
• Marginal Costs/Benefits
Lesson Objectives
1. Define scarcity and give an example.
2. Establish causation: Scarcity necessitates choice; therefore trade-offs cannot be avoided.
o List and describe several methods of rationing.
3. Define opportunity cost.
o Differentiate between trade-off and opportunity cost: the cost is the "next-best" alternative.
4. Develop examples to illustrate the characteristics of cost.
o All costs lie in the future; the anticipation of future consequences shapes peoples' decisions.
o Emphasize that "consequence" and "opportunity cost" are different.
5. To the decision-maker, the relevant value of something is its marginal value.
o Define marginal as additional, or "a little more or a little less," or "the next unit."
Definitions
Demand - The relationship between prices and the corresponding quantities of goods or service buyers are willing to purchase at any given point in time.
Marginal benefit - The increase in total benefit that results from producing, purchasing, or consuming an additional unit.
Marginal cost - The increase in total cost that results from producing an additional unit.
Opportunity cost - The most highly valued sacrificed alternative; the value of the "next-best" choice.
Scarcity - Scarcity means that people cannot obtain as much of something as they want, without making a sacrifice or bearing a cost. Scarcity defines a relationship - between the amount of something we want and the amount that is available.
Supply - The relationship of prices to the quantities of a good or service sellers are willing to offer for sale, at any given point in time.
Trade-off - A choice between alternatives that reveals the opportunity cost of selecting one alternative over the other
Subscribe to:
Posts (Atom)