1. An Introduction to Product Markets

2. What is a Market? Institution or mechanism that brings together buyers and sellers Common element is goods or services are traded Geography, size, or familiarity doesn’t matter –Local, national, or international –Millions of participants or two people –Friends or anonymous –People you never meet

3. Examples of Markets Farmer’s roadside stand Retail stores like Starbucks, Blockbuster Video, Macy’s, Home Depot, Betty’s Hair Salon and Nike Shoes New York Stock Exchange

4. Markets Determine What Will Be Produced by Establishing Prices If no one buys the shoes I’m selling, I will lower price and not produce any more No one else will start producing shoes given my lack of success in selling them If everyone wants my shoes, and I don’t have enough to sell to them, I will raise the price and start producing more shoes Other firms will start producing shoes given my success in getting money for them

5. Markets Determine How Much Will Be Produced by Establishing Price Firms will produce shoes only if they can make a profit To make a profit, the price of the shoes must cover the cost of producing them A firm will not produce shoes if the price is less than what it costs to make them A firm will produce lots of shoes if the price is more than what it costs to make them

6. Markets Determine Who Gets the Goods by Establishing Prices People that can’t afford and don’t want the shoes won’t get them People that can afford and want the shoes will get them

7. Shoes are Bought and Sold in Product Markets Product markets bring together buyers and sellers of shoes (or other goods or services) –People want to buy shoes: they demand shoes if they are willing and able to pay for them –Firms want to sell shoes: they supply shoes if the firm is able and willing to produce them (price covers the cost of production)

8. Money Helps Exchange Shoes are traded for dollars –Shoes have a dollar price –Individuals pay firms dollars for shoes Money is a medium of exchange: it helps consumers get goods by facilitating trade

9. Money Helps Markets Function Smoothly Barter would exist without money Barter is exchanging goods for goods Without money individuals would have to trade shoes for other products (like food) –Individuals selling food might want clothes, not shoes –A three-way trade would have to occur Money makes it easier for individuals to get the goods they want

10. Market Forces Operate through Competition If people cannot get shoes, they will compete against other consumers to get them by bidding up the price As the price goes up, firms will start to produce more shoes If firms cannot sell all the shoes it made, it will compete with other firms for individuals to buy the shoes by lowering the price As the price goes down, more people will buy the shoes

11. An Introduction to Factor Markets

12. Resources are Bought and Sold in Factor Markets Factor markets bring together buyers and sellers of resources Resources are productive (real) resources –Land: any natural resource –Labor: any human resource –Capital: any product used further in production (e.g., machines) –Entrepreneurship (risk taking, like Holden)

13. Resources are Scarce Resources are limited Firms need resources to produce shoes –They demand resources –They will pay a price to get them because they are scarce Rent for land Wages for labor Interest for capital Households sell their labor to firms –They supply resources –They receive payment for them

14. Money Helps Resource Markets Operate Smoothly Money is a medium of exchange: it facilitates trading for resources Without money, trade would be barter –Individuals would be paid for their work with the products they made (shoes) –Individuals might not work (supply no resources) because of the “pay” Money makes it easier for firms to get the resources they want

15. Consumers Determine Resource Use Resources are used only if individuals want what is being produced –Resources will NOT be used to produce a good if individuals are unable or unwilling to pay for it –Resources will be used to produce a good if individuals are able and willing to pay it If firms produce shoes, they need labor and capital that can be used in shoe production. If firms produce cars, they need a different type of labor and capital

16. Prices in Product Markets Determine How Resources are Used Expensive production methods mean high prices –Using “overly productive” resources (like producing shoes in San Francisco or Manhattan or a MD to dig ditches) –Wasting resources Cheaper production methods mean prices will be low –Efficiently using resources –Not wasting resources Fewer people buy shoes at a higher price Low cost production methods used since fewer individuals buy at higher prices (if all shoes the same)

17. Productivity Determines How Much Firms will Pay for Resources Firms can produce more if resources are more productive Firms will pay more for resources that produce more –Firms get more out of a resource it is worth more –Firms will bid up the price of productive resources Wages are higher for more productive workers

18. Competition Establishes the Price of Resources If firms cannot get the resources they need to produce, they will compete against other firms to get them by bidding up the price (e.g., wages increase) As the price of resources goes up, price of product goes up If firms can get lots of a resource (say labor), unemployed workers will compete with other individuals for a job by lowering their asking wage As wages go down, the price of the product goes down

19. Relating Product and Factor Markets in Market Economies

20. Market-Established Prices Answer the 4 Economic Questions All economic systems must address four questions –What will be produced? –How much will be produced? –How will goods and services be produced? –Who will get the goods and services? In a market economy like the U.S., markets answer these questions by determining price

21. What is a Market Economy? An economic system in which resources are based on individual decision making –Firms decide what they will produce –Consumers decide what they will purchase In a planned economy, the government decides what will be produced, how much will be produced, how goods are produced, and for whom the goods are produced

22. The Idea of a Market Economy is Simple Individual buyers and sellers have no plans to follow We enter the markets we wish to trade in and respond to prices within If we want to purchase a good at its price we do; if firms want to produce it at that price they do If we still buy when the price goes up, we’re better off than if we did not buy it (if we weren’t we wouldn’t buy it) If a firm lowers the price of a good, it is still better off than it would be not selling it (if it weren’t, it wouldn’t sell it at the lower price)

23. To Operate Market Economies Need Firms Households/Individuals Property rights Individual decision making

24. Firms A firm is an economic unit that –hires (demands) factors of production (productive resources) –organizes factors to produce and sell (supplies) goods Form does not matter –Corporations: infinite life, limited liability, and can raise money for capital investment (stocks, bonds) –Proprietorship: a single owner –Partnership: two or more owners Critical element is using resources for production

25. Households/Individuals An economic unit that –Buys (demands) goods and services –Sells (supplies) resources to firms to use in production Receive payments for resources –More productive resources have higher prices –Payments include wages (labor), interest (capital), rent (land)

26. Property Rights The social arrangements that say who owns, uses, and disposes of RESOURCES –In a market economy, individuals and firms own and use resources how they want –In a planned economy, the government has this right If individuals/firms have property rights, they use the resources efficiently Other types of so-called property help market economies function smoothly –Financial property (examples)—medium of exchange, like money Stocks Bonds –Intellectual property (intangible products of creativity) Books, music, computer programs, inventions Copyrights and patents establish their property rights

27. Individual Decision Making Individuals enter markets to do what will make them happiest (act in their own self interest) –Buy goods that they want –Sell labor if they want to buy goods Firms enter markets to make profit –Buy resources to produce goods –Sell the goods to make a profit Self motivating actions in markets turn resources into goods and services

28. Product and Factor Markets are Linked Everyone acts in self interest, which creates demand and supply of products and resources In the Factor Market: –Individuals supply labor (or other resource) to firms for wages (or other payment): they want $$ –Firms demand the resources from individuals: they want to produce goods to make $$ In the Product Market: –Individuals demand goods and services: consuming makes them happy –Firms supply goods and services: selling makes them $$