Buyers and Sellers Determine Prices

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Buyers and Sellers Determine Prices

• Principle 5 Markets work with competition,
  information, incentives, and property rights.
• Standards 12.2 Students analyze the elements of
  Americas market economy in a global setting
• Section 1. Understand the relationship of the
  concept of incentives to the law of supply and
  the relationship of the concepts of incentives
  and substitutes to the law of demand.

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Buyers and Sellers Determine Prices

• Standards 12.2 Students analyze the elements of
  Americas market economy in a global setting
• Section 4. Explain how prices reflect the
  relative scarcity of goods and services and
  perform the allocative function in a market
  economy.

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Goals of Buyers and Sellers

• BUYERS
• Make a transaction
• Zero price

• SELLERS
• Infinite Price
• Make a transaction

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The Process of Price Determination
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COMPETITION IS THE REGULATOR

• It constrains buyers and sellers.

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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.

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Buyers want the lowest possible price, but....
DEMAND
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they have to compete against all other buyers.
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Sellers want to charge the highest price
possible, but ......
Supply
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they have to compete against all other sellers.
Supply
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Competition determines the Equilibrium Price
SUPPLY
Demand
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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

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About the buyers
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Influences on the sellers
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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

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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

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Relative Prices
Income 30,000
40
10
20
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Relative Prices Have Not Changed
Income 30,000
Income 60,000
40
80
10
20
20
40
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Supply a relationship
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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.

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Demand a relationship
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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.

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Price Elasticity of Demand

• Measure of the strength of buyers reactions to
  price changes
• If buyers dont react very strongly, inelastic
• If buyers react strongly, elastic

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Determinants of Price Elasticity of Demand

• availability of substitutes
• percentage of income
• time

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Price Elasticity of Supply

• Strength of sellers response to price change
• Determinants
• time
• use of easily transferable resources
• divisibility of inputs.

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Equilibrium Price and Quantity Exchanged
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The Equilibrium Price

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

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Relative Price unit by which we measure relative
scarcity scarcity(Units on the Scarcometer)
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Rank the relative scarcity

• PDUHs eyeballs
• Uncle Sam
• High School Musical

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Order these products in terms of relative scarcity

• yacht
• candy bar
• dinner for one at MacDonalds
• a nice dinner for two in LA
• laptop computer
• Toyota mini truck
• ticket to a professional baseball game

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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.

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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.

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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.

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Main Points

• Price elasticity of supply is the measure of the
  strength of sellers response to a price change
• The determinants of price elasticity of supply
  are time, use of easily transferable resources,
  and divisibility of inputs.

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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.
• Price is the measure of relative scarcity