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Economics for business chris mulhearn and howard r. vane.

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Presentation on theme: "Economics for business chris mulhearn and howard r. vane."— Presentation transcript:

1 economics for business chris mulhearn and howard r. vane

2 Markets are the arenas in which firms & consumers (& governments) interact to determine how resources are allocated Were going to focus here on goods markets – markets for goods & services – as supplied by firms to consumers Other markets that well look at later include, for example, the labour market, where well use the same general principles we introduce here Because were looking at goods markets, we need to reflect on the aspirations of consumers & firms in these markets – what do they want & what are the chief influences on their behaviour? Lecture 2: The market – introducing demand & supply

3 What determines the quantity demanded for a good or service in a market? How many Big Macs / cinema tickets / mobile phone contracts, etc.? The most evident factor here is price If we assume that all other influences upon demand remain unchanged (the so-called ceteris paribus assumption), then higher prices will usually be associated with a lower quantity demanded Similarly, lower prices will usually be associated with a greater quantity demanded. We can illustrate the inverse nature of the relationship between price & quantity demanded graphically Consumers & demand

4 Price Quantity demanded 0 D1D1 Q1Q1 Q2Q2 Q3Q3 P2P2 A contraction in quantity demanded An extension in quantity demanded Demand extends P3P3 P1P1 Demand contracts A price rise prompts A price cut prompts Note: this and later material suggests that consumers behave rationally. Well question this assumption later The effect of a change in price on quantity demanded

5 None-price influences on demand Beyond price, there are other factors which have some bearing upon the demand for a good Here, demand refers not to a particular quantity & a particular price but to all possible prices & quantities demanded Consider, for example, the influence of a change in the incomes of consumers on demand If incomes rise then, ceteris paribus, we would anticipate that the demand for a normal good to increase whatever its particular price On the other hand, a fall in consumer incomes would prompt a decrease in the demand for a normal good

6 The effect of a change in income on the demand for a normal good Price Quantity demanded0 D1D1 Q1Q1 Q2Q2 Q3Q3 P1P1 Decrease in demand at all possible prices Increase in demand at all possible prices Demand curve shifts right or left D2D2 D3D3

7 The prices of other goods & services Some goods and services have substitutes - viewing a downloaded film at home might be thought of as substitute for a visit to the cinema On the other hand, some other goods & services are said to be complementary, in the sense that they are consumed jointly - apps for an iPhone are useless without an iPhone So, considering the demand for paid-for apps, what would be the outcome of a fall in the price of iPhones? The expectation is that, ceteris paribus, the demand for apps would increase as more people demand iPhones & the apps that enhance them Other non-price influences on demand

8 The preferences or tastes of consumers At different times, consumers take different views as to the attractiveness of particular goods & services For example, in every city in Britain over the last ten years there has been an explosion in the number of internationally branded coffee shops: Starbucks; Costa Coffee; Caffé Nero This means the demand curve for coffee-shop coffee has shifted to the right Other non-price influences on demand (cont.)

9 Factors that influence the demand for a particular good Factor Effect Price Price changes cause movements along a demand curve. Price decreases are associated with extensions in the particular quantity demanded. Price increases are associated with contractions in the particular quantity demanded. Income Tastes & preferences Prices of other goods A change in any one of these factors will cause a shift in the demand curve itself, with increases or decreases in demand at every possible price.

10 The role of the firm is to supply goods & services to the marketplace So what influences firms decisions in respect of the quantity supplied of a particular good or service? Answer - price The higher the price of a particular good, the greater the incentive for firms to supply it Firms seek to maximize the profits they earn & they do this by producing as many profitable commodities as they can A higher price for a particular good will prompt firms to raise the quantity supplied in the pursuit of greater profit. Firms and supply

11 The effect of a change in price on quantity supplied Price Quantity supplied 0 S1S1 Q1Q1 Q2Q2 Q3Q3 P2P2 A contraction in quantity supplied An extension in quantity supplied Supply extends P3P3 P1P1 Supply contracts A price rise prompts A price cut prompts

12 There are other factors beyond price that have some bearing upon the supply of a good Here, supply refers not to a particular quantity & a particular price but to all possible prices & quantities supplied We have already noted that firms are interested in the profit yielded by their output & that this is a function of both price & the cost of production It follows that lower production costs will occasion increases in supply. The nature of the link between the cost of production & supply can be illustrated graphically Non-price influences on supply

13 The effect of a change in production costs on supply Price Quantity supplied 0 S1S1 Q1Q1 Q2Q2 Q3Q3 P1P1 Decrease in supply at all possible prices Increase in supply at all possible prices Supply curve shifts to left or right S 3 (higher production costs) S 2 (lower production costs)

14 Factors that influence the demand for a particular good Factor Effect Price Price changes cause movements along a supply curve. Higher prices are associated with extensions in the particular quantity supplied. Lower prices are associated with contractions in the particular quantity supplied. A change in either of these factors will cause a shift in the supply curve itself, with increases or decreases in supply at every possible price. Input costs Technology

15 Market – bringing demand and supply together Price Quantity demanded 0 D1D1 Q1Q1 Q2Q2 Q3Q3 P2P2 S1S1 P3P3 P1P1 Excess supply Excess demand For each market a unique equilibrium price

16 Lets buy a mens T shirt – what price to pay? Primark = £2 Paul Smith = £100 How can the market analysis weve introduced make sense of T shirt prices that vary so widely? We have two separate markets here, with different products on offer & different conditions prevailing in each If this were not the case people would be unwilling to pay fifty times as much as they needed to for a T shirt & Paul Smith would not be the fashion icon he undoubtedly is Market analysis – two examples

17 Primark claims that its clothing is the cheapest on the high street & that its low prices arise from bulk purchasing & costless word-of-mouth advertising Primarks prices are also low because it sources its products globally, taking advantage of low labour cost locations Because labour is the largest cost input, much of the worlds clothing production now takes place in countries where wages are low It appears that Primark has a cost-driven business model: it identifies the fashions that it thinks will sell & then gets them into its shops in significant quantities as quickly & as cheaply as possible Primark T shirts

18 Paul Smiths business model is different His products are organized in twelve distinct collections with design based in Nottingham & London, & materials sourcing & production mostly in Britain, Italy & France Here then there is less emphasis on cost control & more on bespoke design, product quality & the personal imprimatur that Paul Smith himself places on a relatively limited range of goods Paul Smith T shirts

19 By now you may be able to see where were going with this On the one hand we have a bulk producer that sources globally & aspires to get price-competitive fashion into (& out of) its shops as quickly as possible The result is crystallized in the £2 T shirt; the £10 dress & so on: high-turnover fashion for the majority On the other hand, there is the design-intensive western European producer of a limited range of clothing & related products in relatively constrained quantities The result is the £100 T shirt, the £300 shoes, and the £650 dress: fashion for the discerning & affluent Really, there are two distinct markets here Primark and Paul Smith compared

20 The stylized markets compared PP 0 0Q Q DS DS P2P2 P1P1 Q1Q1 Q2Q2 Paul Smiths market Primarks market

21 Gold is a robust & highly-prized metal held in three forms About half is used as jewellery; a further ten per cent is used in dentistry & industry; the rest is devoted to investment by the private sector, or held by the worlds central banks Of these three sources of demand, one is especially volatile Gold is a safe-haven asset - in turbulent periods its a way to store value, or even profitably speculate, so the price of gold may be thought of as largely demand-driven In March 2008 the price of gold passed the $1,000 mark for the first ever time Market analysis – the price of gold

22 The price of gold s stagflation Inflation controlled and economies growing The recession

23 Will gold prices remain above $1,000? If the world economy recovers only slowly from the recession then investors demand for gold is likely to remain strong because of the continuing risks attached to rival assets, such as property & stocks On the other hand, a sharp upturn in the worlds economic prospects may spark fears about the macroeconomic phenomenon of inflation, which erodes the purchasing power of money Again, in these circumstances, golds status as a haven asset makes it attractive to investors Gold prices in the future


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