Decision Making in Markets Flashcards
What is a market
A market consists of all people who are interested in buying or selling a particular good or service.
Markets can be:
local,
state-wide,
national or
global
price setting mechanism (price must be right)
The market price is set by the interaction between buyers and sellers.
A transaction/exchange of goods/services will only occur if the buyer and seller can agree on a price
The price-setting mechanism refers to how the market price of good/services is determined by the market
market structure characteristics
Number of firms
Variety of goods/services
Barriers to entry
Access to information
Control over prices
no of sellers
High or low number of sellers
More sellers = higher level of competitiveness and lower Market Power
variety of goods and services
Homogenous or Differentiated goods/services
Which affects level of competition, affecting importance of branding
barriers to entry
Barriers to enter/exit the market
Which affects number of sellers/competitors
access to info
Access to Perfect information
Access to information about market
prices, trends, conditions and
product information affects quality
of decisions made by buyers
control over prices
Businesses are Price Makers or Price Takers
Where consumers can only accept the prices set; vs influence it
market pwr
Refers to the ability of any particular business to control or manipulate prices or quantities of goods/services offered in a market.
Affected by the number and quality of
sellers in a market.
Less competitors = more power
why is high market pwr bad
Businesses become price makers
(they set the price of products);
consumers would have no choice
Quality and productive efficiency suffers
as businesses have no need to improve since
again consumers have no choice
Poorer quality and efficiency reduces our
international competitiveness (ability to
compete in global markets)
All this lowers living standards
WHY LOW MARKET POWER IS GOOD
Because more competition creates:
Greater variety of goods and services
Better quality of goods and services
Lower prices for consumers
Better and more transparent
information for consumers
Faster pace of innovation
Improved living standards
PERFECT (PURE) COMPETITION
PERFECT (PURE) COMPETITION
Many sellers/firms/businesses and buyers
Goods are homogenous (no differentiation)
Competitors ease of entry into market (no barriers)
Buyers and sellers can access perfect information
Businesses are price takers (businesses are
unable to set prices)
No Market Power
Example markets: Fruit and veg, petrol
MONOPOLISTIC COMPETITION
MONOPOLISTIC COMPETITION
Many sellers/firms/businesses and buyers
NOT homogenous – products are not identical
Competitors ease of entry/exit into market
Buyers and sellers can access good-perfect information
Businesses are somewhat price takers (competing businesses are able to set
varied prices but within a limit accepted
by consumers)
Small amount of market power
Example markets: fast food, clothing
OLIGOPOLY & DUOPOLY
OLIGOPOLY & DUOPOLY
Few sellers/firms/businesses
Goods can be either homogenous (eg; oil) or differentiated (eg; phones). Brand names are extremely important to differentiate
Competitors difficult to enter market due to high costs to enter, regulations, patents/copyright issues, etc
Perfect information does not always exist because suppliers usually have more information about the market conditions and the products
Large amount of market power
Example markets: Banking, Supermarkets, computers, Fossil fuels
Note: duopoly is a type of oligopoly but with only two competing firms
which market is ideal
PURE COMPETITIVE MARKETS IS DA BEST!
PERFECT (PURE) MONOPOLY
PERFECT (PURE) MONOPOLY
One large seller/firm in the market
Differentiation is not important
Very difficult/impossible for competitors
to enter market
Price maker (able to set or influence prices/quantities)
Complete market power
‘Example’ markets (Don’t really exist anymore as they are illegal in Australia): public/state owned “natural monopolies” such as airports, postal service, utility infrastructure/distribution
STRATEGIES TO INCREASE PROFITS
STRATEGIES TO INCREASE PROFITS
Good Companies will try to:
Increase Sales
Advertising/Marketing
Multibranding
Nudging
Decrease Expenses
Productive/Allocative Efficiency
Bad Companies will try to:
Undertake Anti-competitive behaviour
INCREASE SALES: ADVERTISING/MARKETING
INCREASE SALES: ADVERTISING/MARKETING
To increase their share of the market, businesses
might undertake some of these advertising/
marketing strategies:
Advertising mediums (TV, radio etc)
Product placement in films
Positioning products in strategic locations (such as confectionary companies ensuring their products feature prominently in supermarkets)
Positioning business in strategic locations (such as McDonald’s ensuring their stores are positioned in high traffic areas)
advertising and marketing strats cont
Publicity of the product or brand, such as media reporting contributions to charitable organisations
Sponsorship of events or sporting teams
Rewards or loyalty programs
Sales and limited time discounts
Use of celebrity endorsements, Influencers and social media
INCREASE SALES: MULTIBRANDING (REVIEW)
INCREASE SALES: MULTIBRANDING (REVIEW)
Multibranding is defined as individual companies marketing their products under separate and distinct brand names.
Some Examples:
Coca-Cola producing numerous soft drink brands (including Coke, Fanta and Sprite)
Cadbury producing a
number of chocolate brands
(including Flake, Dairy Milk
and Roses)
Kellogg’s producing various
brands of cereal (including
Cornflakes, Special K and
Rice Bubbles).
WHY MULTIBRANDING? (REVIEW)
WHY MULTIBRANDING? (REVIEW)
A company may want to take on a multi-brand strategy to:
Hold more supermarket space
Use its brand reputation to boost
products made in other markets
Appeal to audiences who like novelty
or trying new things
reach a different audience
create a luxury line to appeal to a
consumer willing to pay more.
All resulting in more sales = more profits
DECREASE EXPENSES: PRODUCTIVE EFFICIENCY
DECREASE EXPENSES: PRODUCTIVE EFFICIENCY
Businesses will seek to achieve the most cost-efficient method of production. This will often include the following types of strategies:
Sourcing the highest quality
and quantity of natural
resources at the lowest cost
Investing in more efficient capital
resources technology or machinery
Investing in higher quality labour resources
(e.g. Training/reskilling employees
or employing highly skilled employees)
ANTI-COMPETITIVE BEHAVIOURS
ANTI-COMPETITIVE BEHAVIOURS
Strong competition is good for consumers, but can reduce business profits and market share
There are strategies that businesses sometimes use to win market share, some legal and some which are not.
ANTI-COMPETITIVE BEHAVIOURS, WHAT HAS BEEN TO DONE TO STOP IT
ANTI-COMPETITIVE BEHAVIOURS
Known as anti-competitive behaviour, some companies engage in it to
weaken competition
boost their market power
increase prices without consequence
Laws are usually in place to punish those who engage in it
ANTI-COMPETITIVE BEHAVIOURS (list)
ANTI-COMPETITIVE BEHAVIOURS
Price discrimination
Predatory pricing
Cartel behaviour
Price fixing
Exclusive dealing
Collusive bidding
Market zoning
PRICE DISCRIMINATION
how does it help maximise revenue
PRICE DISCRIMINATION
Price discrimination involves a business charging consumers different prices for the same product.
It enables businesses to maximise revenue by;
- imposing a higher price for ‘high value’ customers (namely those with the ability and preparedness to pay more)
- and a lower price to ‘low value’
customers (namely those unable
or unwilling to pay a higher price).
This allows more customers (because
even though they get less from the
low value customers, it is better
than nothing)
It is only illegal if it harms
competition or is misleading
or biased toward groups of
people (eg; not for equitable reasons)
PREDATORY PRICING
PREDATORY PRICING
When a dominant company deliberately sets its prices at such a low level that a competitor cannot match, with the purpose of damaging or forcing them to withdraw from the market.
Once the competitor is eliminated, the company is then able to again dominate the market, exercise a greater degree of market power and raise prices to the detriment of consumers and society.
In effect, the company is behaving like a predator, seeking out and eliminating or devouring its competitors.
In a competitive sense, this is normal profit-maximising behaviour of businesses, and would exist regularly if it were not for government intervention.
CARTEL CONDUCT (define and list types)
CARTEL CONDUCT
A cartel is defined as two or more businesses joining forces to maximise profits.
It means that they agree not to compete against each other and instead develop joint strategies to manipulate the market at the expense of consumers.
Cartel conduct includes the following types of agreements.
Price fixing
Exclusive dealing
Collusive bidding
Market zoning
CARTELS: PRICE FIXING (PRICE GOUGING)
CARTELS: PRICE FIXING (PRICE GOUGING)
Where companies collaborate instead of compete to set prices together with the purpose of controlling prices, supply and demand, often to the detriment of consumers and society.
CARTELS: EXCLUSIVE DEALING
CARTELS: EXCLUSIVE DEALING
Where companies refusing to supply goods and services to particular companies to control the market prices
CARTELS: COLLUSIVE BIDDING
CARTELS: COLLUSIVE BIDDING
A normal tender is intended to award the contract to the lowest bidder from competitive companies.
However, if companies agree to take turns winning the bids and also raise their bids amounts collectively, they can artificially manipulate
and inflate the final cost
of the tender, meaning
higher profit to the
winner who also shares
the extra profits with
the others.
CARTELS: MARKET ZONING/SHARING
CARTELS: MARKET ZONING/SHARING
Market zoning happens when competitors agree to divide a market between themselves so they don’t compete. They may agree to:
avoid producing each others’ goods or services
serve different geographical areas
divide contracts by value
assign customers to each competitor, with
an understanding not to win each
other’s customers.
GOVERNMENT INTERVENTION THROUGH LAWS
+ result?
GOVERNMENT INTERVENTION THROUGH LAWS
The Australian Competition and Consumer Act 2010* is designed
to protect consumers by outlawing these behaviours
What was the result?
* formerly known as the ‘trade practices act (1974)’.
IS THERE SUCH THING AS A LEGAL CARTEL?
IS THERE SUCH THING AS A LEGAL CARTEL?
Example of a legalised cartel:
Organisation of Petroleum Exporting Countries(OPEC).
Made up of 14 oil-producing countries formed OPEC cartels worldwide, their objective is to work together to stabilize the oil market in the countries.
They aim to sell oil at reasonable prices to consuming countries.
CARTEL CONDUCT – CASE STUDIES
CARTEL CONDUCT – CASE STUDIES
Norwegian shipping firm Wallenius Wilhelmsen Ocean (WWO) were fined $24 million dollars by the Federal Court of Australia for criminal cartel conduct – the largest criminal fine ordered under the Competition and Consumer Act.
This conduct involved a cartel arrangement between WWO and its competitors who agreed upon allocating major vehicle manufacturers to cooperate with, thus artificially distorting competitive freight rates.
THE PRICE SETTING MECHANISM
THE PRICE SETTING MECHANISM
Price signals are changes in market prices that convey information to buyers and to sellers to make economic decisions on resource allocation, behaviour, and thus supply/demand
Buyers prefer lower prices and so as
more the price rises, the less likely to
buy (= less demand), and vice versa
Sellers prefer higher prices and so as
more the price falls, the less willing to
produce/sell (= less supply), and
vice versa
LAW OF DEMAND
LAW OF DEMAND
Law of demand = as price increases, demand decreases. As price decreases, demand increases.
In other words, price affects demand
Sellers are more likely to reduce prices if they can get more sales (and thus overall profit) from it, and vice versa
Practice: https://practice.mru.org/demandgraph/
MOVEMENT ALONG THE DEMAND CURVE (DUE TO PRICE FACTORS)
MOVEMENT ALONG THE DEMAND CURVE (DUE TO PRICE FACTORS)
When there is a price change (due to price factors) and other factors are kept constant, there is a movement along the demand curve
As the price increases, less quantity is demanded (there is a contraction in demand)
When the price falls, more quantity is demanded (there is a expansion in demand).
This terminology MUST be used!
FACTORS THAT HAVE AN EFFECT ON QUANTITY DEMANDED
FACTORS THAT HAVE AN EFFECT ON QUANTITY DEMANDED
Contraction
Changes in quantity demanded caused by price factors for a product are shown by movements along the demand curve
BUT;
Changes in quantity demanded caused by non-price factors are demonstrated by shifts to the left or right of the demand curve
NON-PRICE FACTORS THAT HAVE AN EFFECT ON QUANTITY DEMANDED
NON-PRICE FACTORS THAT HAVE AN EFFECT ON QUANTITY DEMANDED
Due to non-price factors…
When quantity demanded increases at every price, the curve shifts to the right
When quantity demanded decreases at every price, the curve shifts to the left.
This terminology MUST be used!
1 Changes in preferences, fashions and tastes
2 Change in population size/age distribution/demographics
NON-PRICE FACTORS THAT SHIFT THE DEMAND CURVE
1 Changes in preferences, fashions and
tastes
Effect from COVID/Post COVID
Work from home
Recycled fashion/nostalgia from 80s 90s etc
Environmental concerns
Success of advertising/media attention
Awareness campaigns eg climate change, single use plastics
Boycotting products from certain companies/countries
Special days (Valentines, Mothers day, Pepero day)
2 Change in population size/age distribution/demographics
Growing aging populations
Slowing of new births
3 Change in disposable income (after tax)
4 Consumer Confidence/Sentiment
NON-PRICE FACTORS THAT SHIFT THE DEMAND CURVE
3 Change in disposable income (after tax)
Tax changes to incomes
Addition/change removal of taxes/levies (eg GST, Medicare)
Change in interest rates
4 Consumer Confidence/Sentiment
Confidence in economy
Saving due to fears of unemployment, inflation, wars, pandemics and impactful world events, economic decline
Spending due to confidence of stable income, economic growth, panic buying
5 Change in price of substitutes
6 Change in price of complements
NON-PRICE FACTORS THAT SHIFT THE DEMAND CURVE
5 Change in price of substitutes
Cabbage was used when lettuce prices increased (due to supply issues).
What happened to the price of cabbages (due to higher demand)?
6 Change in price of complements
Coffee and sugar prices (if coffee increases in prices, demand for both coffee and sugar will drop)
Cheese and cracker prices
Fuel guzzling type cars and fuel prices
THE LAW OF SUPPLY
THE LAW OF SUPPLY
Law of Supply = as prices increase, supply increases; as prices decrease, supply decreases
In other words, price affects supply
Producers more likely to produce (and reallocate resources) if they can get higher prices for it, and vice versa
Practice: https://practice.mru.org/supplygraph/
MOVEMENT ALONG THE SUPPLY CURVE (DUE TO PRICE FACTORS)
MOVEMENT ALONG THE SUPPLY CURVE (DUE TO PRICE FACTORS)
When there is a price change (due to price factors) and other factors are kept constant, there is a movement along the supply curve
As the price increases, more supply is demanded (there is a expansion in supply)
When the price falls, less supply is demanded (there is a contraction in supply).
This terminology MUST be used!
FACTORS THAT HAVE AN EFFECT ON QUANTITY SUPPLIED
FACTORS THAT HAVE AN EFFECT ON QUANTITY SUPPLIED
Changes in quantity supplied caused by price factors for a product are shown by movements along the supply curve
BUT
Changes in quantity supplied caused by non-price factors are demonstrated by shifts to the left or right of the supply curve
SHIFTS IN THE SUPPLY CURVE
(DUE TO NON-PRICE FACTORS)
SHIFTS IN THE SUPPLY CURVE
(DUE TO NON-PRICE FACTORS)
Due to non-price factors…
When quantity supplied increases at every price, the curve shifts to the right
When quantity supplied decreases at every price, the curve shifts to the left.
This terminology MUST be used!
1 Changes in Profitability due to changing Cost of Production
2 Changes in Productivity
3 Changes in innovation and costs of technology
NON-PRICE FACTORS THAT SHIFT THE SUPPLY CURVE
1 Changes in Profitability due to changing Cost of Production, eg;
Changes in cost of imported and local raw materials used in production (land, capital)
Increase/decrease in wage costs to produce a unit of output (labour)
Change in cost of utilities (capital)
2 Changes in Productivity
Change in how many units produced in a given time frame
3 Changes in innovation and costs of technology
Machines that increase productive efficiency
4 Changes in climatic conditions (agriculture)
5 Changes in environment (ecosystem)
NON-PRICE FACTORS THAT SHIFT THE SUPPLY CURVE
4 Changes in climatic conditions (agriculture)
Flood (eg lettuce prices)
Drought
Fire
Natural disasters
Climate change
Desertification
Pollution
5 Changes in environment (ecosystem)
Extinctions of pollinators due to pesticides)
Extinctions due to over farming (eg fishes/eels)
Extinctions due to Poaching (whales, rhinos)
Extinctions of local fauna/flora due to introduced pest species (eg rabbits/foxes/bats/cane toads/starfish)
6 Changes in availability of resources
7 Government Interventions:
NON-PRICE FACTORS THAT SHIFT THE SUPPLY CURVE
6 Changes in availability of resources
Supply chain issues
Political blockages & sanctions (eg china’s coal ban)
War
7 Government Interventions:
Change in level of govt assistance (subsidies)
Govt disincentives (excise (not income) taxes)
Increase/decrease in company tax rates
Costs of complying with government laws and regulations
Change on tariffs (taxes on imports/exports)
Trade agreements between nations
List the non-price factors that shift Demand
List the non-price factors that shift Demand
Change in preferences
Change in incomes
Change in population/demographics
Change in consumer confidence
Change in relative price of substitutes & complements
List the non-price factors that shift Supply
List the non-price factors that shift Supply
Change in cost of production (and thus profitability)
Change in innovation (and thus productive efficiency
Change in climatic conditions (natural disasters)
Change in environment (ecosystem)
EQUILIBRIUM PRICE
EQUILIBRIUM PRICE
Equilibrium price: the price where:
the total quantity demanded
is equal to
the total quantity supplied.
i.e Where the demand and supply curves intersect
There is no supply shortage or surplus of goods and services at this price point
CHANGES TO EQUILIBRIUM
CHANGES TO EQUILIBRIUM
The Equilibrium price changes when the conditions
affecting demanders (consumers) and suppliers
(producers) change
The demand and/or supply lines will shift or move in response.
Market prices and quantities will move up and down in response to
restore the equilibrium
Equilibrium = market is at state of rest. Market is “cleared”
Disequilibrium = market changes due to the non-price factors affecting both curves
Where prices are at disequilibrium:
If Excess demand > supply, resulting in supply shortage
If Demand < excess supply, resulting in supply surplus
HOW DOES IT WORK: DEMAND DRIVEN
HOW DOES IT WORK: DEMAND DRIVEN
Increase in Demand
effect on equilibrium
Decrease in Demand
effect on equilibrium
Increase in QUANTITY demanded
caused by a non-price factor
will create a shortage in the market.
The price will rise until
the shortage is cleared through
increasing supply and falling demand
Result: Higher prices, higher quantity
Decrease in QUANTITY demanded
caused by a non-price factor
will create a surplus in the market.
The price will fall until
the surplus is cleared through
reducing supply and rising demand
Result: Lower prices, lower quantity
HIGHER DEMAND IMPACT ON EQUILIBRIUM
HIGHER DEMAND IMPACT ON EQUILIBRIUM
In the graph, the demand curve has shifted to the right from D1 to D2 [1], because [non-price factor] resulting in an increase in quantity demanded at each and every price level, while supply has remained constant.
The initial increase in demand creates a shortage at the original price (P1), where quantity demanded is greater than quantity supplied. [2]
The shortage puts upward pressure on prices at each and every quantity level. [3]
As the price increases, this sends a signal to suppliers that profit maximisation opportunities exist from increased production and to thus reallocate resources into it. As a result, supply expands [4] (movement along the supply curve).
At the same time, as consumers are less willing or able to purchase the product at a higher price, demand contracts [5] (movement along the demand curve).
The market adjusts from Equilibrium price (E1) to a higher Equilibrium price (E2) (from P1 to P2) [6], with an increased quantity of goods and services (from Q1 to Q2) [7], as a result of the [non-price factor].
LOWER DEMAND IMPACT ON EQUILIBRIUM
LOWER DEMAND IMPACT ON EQUILIBRIUM
In the graph, the demand curve has shifted to the left from DI to D2 [1], because [non-price factor], resulting in a decrease in quantity demanded at each and every price level, while supply has remained constant.
The initial decrease in demand creates a surplus at the original price (PI), where quantity supplied is greater than quantity demanded. [2]
The surplus puts downward pressure on prices at each and every quantity level. [3]
As the price decreases, this sends a signal to suppliers that production is not as profitable as it once was and to reallocate resources into other areas. As a result, supply contracts [4] (movement along the supply curve)
At the same time, as consumers are more willing or able to purchase the product at the lower price, demand expands [5] (movement along the demand curve).
The market adjusts from Equilibrium price (E1) to a lower Equilibrium price (E2) (from P1 to P3) [6] with a decreased quantity of goods and services (from Q1 to Q2) [7], as a result of the [non-price factor].
HOW DOES IT WORK: SUPPLY DRIVEN
HOW DOES IT WORK: SUPPLY DRIVEN
Increase in Supply
effect on equilibrium
Decrease in Supply
effect on equilibrium
Increase in QUANTITY supplied
caused by a non-price factor
will create a surplus in the market.
The price will fall until
the surplus is cleared through
reducing supply and rising demand
Decrease in QUANTITY supplied
caused by a non-price factor
will create a shortage in the market.
The price will rise until
the shortage is cleared through
increasing supply and falling demand
HIGHER SUPPLY IMPACT ON EQUILIBRIUM
HIGHER SUPPLY IMPACT ON EQUILIBRIUM
In the graph, the supply curve has shifted to the right from SI to S2 [1], because [non-price factor], resulting in an increase in the quantity supplied at each and every price level, while demand has remained constant.
The initial increase in supply creates a surplus at the original price (PI), where quantity supplied is greater than quantity demanded. [2]
The surplus puts downward pressure on prices at each and every quantity level. [3]
As the price decreases, this sends a signal to suppliers that production is not as profitable as it once was and to reallocate resources into other areas. As a result, supply contracts [4] (movement along the supply curve)
At the same time, as consumers are more willing or able to purchase the product at the lower price, demand expands [5] (movement along the demand curve).
The market adjusts from Equilibrium price (E1) to a lower Equilibrium price (E2) (from P1 to P3) [6] with a increased quantity of goods and services (from Q1 to Q2) [7], as a result of the [non-price factor].
LOWER SUPPLY IMPACT ON EQUILIBRIUM
LOWER SUPPLY IMPACT ON EQUILIBRIUM
In the graph, the supply curve has shifted to the left from SI to S2 [1], because [non-price factor], resulting in a decrease in the quantity supplied at each and every price level, while demand has remained constant.
The initial decrease in supply creates a shortage at the original price (PI), where quantity demanded is greater than quantity supplied. [2]
The shortage puts upward pressure on prices at each and every quantity level. [3]
As the price increases, this sends a signal to suppliers that profit maximisation opportunities exist from increased production and to thus reallocate resources into it. As a result, supply expands [4] (movement along the supply curve).
At the same time, as consumers are less willing or able to purchase the product at a higher price, demand contracts [5] (movement along the demand curve).
The market adjusts from Equilibrium price (E1) to a higher Equilibrium price (E2) (from P1 to P2) [6], with a decreased quantity of goods and services (from Q1 to Q2) [7], as a result of the [non-price factor].
RESOURCE ALLOCATION AND RELATIVE PRICES
RESOURCE ALLOCATION AND RELATIVE PRICES
Producers will be more willing to produce/supply products that are high in demand (and thus reallocate resources to it).
Because it is more profitable this way due to increased quantity demanded and the upward pressure on prices due to demand increase. (Can sell more and at higher prices)
Consumers will be more willing to buy/demand products that are lower in price
Because they can get more value when meeting needs and wants. (Can buy more at lower prices)
Changes in prices of products will therefore change incentives for consumers and producers on what they choose to buy/supply usually..
..which will change the types of goods/services that are produced or consumed.
The value of a good or service is determined by?
what is relative price?
what are the two types of goods affected by relative price?
The value of a good or service is determined by consumers willingness to pay relative to availability
Relative price is the price of one good/service in terms of another
There are two types of goods affected by relative price:
complementary and substitute goods
Substitutes
Substitutes one product with another cheaper alternative with similar functions or meets similar needs/wants.
This usually ends up with the substitute product also changing its price.
SUBSTITUTE EXAMPLES
SUBSTITUTE EXAMPLES
Pepsi and Coca-Cola
McDonalds and Burger King
PlayStation and Xbox
Supermarket-branded and Branded products
Transport by Car or Train
iPhone and Samsung Galaxy
Pizza Hut and Domino’s
Physical Books and Kindle
COMPLEMENTS
COMPLEMENTS
A change in pricing in one product may influence changes to pricing in another product that is usually used together, goes along with or is associated with the product.
This usually ends up with the complement product also changing its price.
complement egs
COMPLEMENT EXAMPLES
Tennis Balls and Tennis Racket
Mobile Phones and Sim Cards
Petrol and Cars
Burger and Burger Buns
PlayStation and Games
Movies and Popcorn
Shoes and Insoles
Pencils and Notebooks
HOW THE PRICE SYSTEM HELPS ANSWER THE 3 BIG ECO QUESTIONS
HOW THE PRICE SYSTEM HELPS ANSWER THE 3 BIG ECO QUESTIONS
Due to relative scarcity, we have to make decisions on the resources available and the information at hand
Relative price signals help with this.
Over a period of time, the relative prices of each good or service change due to new non-price conditions affecting the level of demand and/or level of supply.
In turn, changes in relative prices cause price signals that act as incentives or disincentives for decision makers.
Profitability = The level or degree
of how much an activity or process
can make a profit
WHAT AND HOW MUCH TO PRODUCE?
(in relation to price system)
WHAT AND HOW MUCH TO PRODUCE?
Producers opt to produce what is are relatively most profitable and wanted by consumers.
Example:
Imagine that the equilibrium market price of
ice-cream increased relative to that for yoghurt
due to an increase in consumer demand for
ice-cream (due to non-price factors like successful
advertising, population growth, etc.)
Meanwhile the demand for yoghurt fell
(due to a non-price factor like a health scare).
Ice-cream would most likely be relatively more profitable than yoghurt.
Higher profitability in ice-cream would act as a positive incentive, attracting extra resources into this area of production, while perhaps pulling resources away from yoghurt.
WHAT AND HOW MUCH TO PRODUCE?
(cont)
(in relation to price system)
WHAT AND HOW MUCH TO PRODUCE?
Issues
May cause more production of socially undesirable yet profitable goods and services (e.g. illegal drugs, pollution, guns and prostitution) (Market failure),
May cause under-production of lower priced, unprofitable or socially desirable goods and services (e.g. affordable healthcare, education and housing).
Government intervention may be needed
in these situations
Laws/regulations
Taxes/subsidies
Incentives/disincentives
HOW TO PRODUCE?
(in relation to price system)
HOW TO PRODUCE?
To maximise profits, producers usually seek to minimise production costs and maximise efficiency.
Example: Producers would prefer to produce a pair of jeans using labour resources if it is cheaper than using capital equipment like laser-operated machines.
The market-based system involving demand and supply would provide the necessary price information as to which production method is the cheapest to use. Labour might be cheaper in this example due to its supply being high relative to demand.
HOW TO PRODUCE?
(cont)
(in relation to price system)
HOW TO PRODUCE?
Issues
May encourage cheap production methods that could risk the wellbeing, health and safety of workers and the general community.
For example, cutting costs via having dangerous working conditions or releasing pollution.
Government intervention may be needed
in these situations
Laws/regulations
Taxes/subsidies
Incentives/disincentives
FOR WHOM TO PRODUCE?
FOR WHOM TO PRODUCE?
More incomes = more purchasing power = ability to buy more goods and services.
Individuals who earn higher incomes by selling their scarcer resources (eg; skills) can purchase more goods and services than those on lower incomes.
For example, high wages and incomes earned by skilled surgeons, successful entrepreneurs and well-known pop stars and sportspersons, who can sell scarce resources where there is a shortage and their supply is low relative to demand.
FOR WHOM TO PRODUCE?
(cont)
(in relation to price system)
FOR WHOM TO PRODUCE?
Issues
May lead to extreme income inequality and poverty, which lowers average living standards.
Government intervention may be needed
in these situations
Laws/regulations
Progressive Taxes/subsidies
Incentives/disincentives
COFFEE CASE STUDY ACTIVITY
Description
Market structure/power
Competitors (number, brands)
Demand
COFFEE CASE STUDY ACTIVITY
Description
Market structure/power
Competitors (number, brands)
Demand
Who/where/how are the buyers?
What non-price factors affect demand
Draw a D-S curve that shows the effect of one
of the non-price factors on demand to the
market equilibrium
Supply
Who/where/how are the suppliers?
What non-price factors affect supply
Draw a D-S curve that shows the effect of one of the non-price factors on supply to the
market equilibrium
Effects
How do price changes affect decisions made based on the 3 big Eco questions (what and how much, how, for who)
