Part 1 Marketing Basics Chapter 4 Market Forces Ch4

Learning Goals describe the three types of economic systems describe the three main features of a market economy identify the three main market forces explain the effect that price has on supply and demand, and that supply and demand have on price (Continued)

Learning Goals identify three factors that cause changes in demand describe three ways a business can increase profits explain the role of the consumer in determining which products get produced

Marketing Terms supply scarcity market demand traditional economy command economy market economy mixed economy demand supply market demand market supply law of demand law of supply profit motive productivity competition

Scarcity Scarcity a condition in which there are not enough resources to meet needs Scarcity leads to three questions. What should we produce? How should we produce it? Who should get the products?

Types of Economic Systems Three basic types of economies traditional economy command economy market economy

Traditional Economy In a traditional economy, elders answer the economic questions based on traditions. In Canada, some Inuit still maintain a traditional economy.

Command Economy In a command economy, the national government makes all the economic decisions. Everyone in the country shares limited resources. Features government ownership of land and capital government control of labour government control of all economic activity

Market Economy In a market economy, individuals make economic decisions. Individuals decide what to produce how to produce it who gets the products

Market Economy Features Three main features of a market economy private property economic freedom market forces Ch4

Mixed Economies There are no pure command or pure market economies. Most modern economies are mixed economies.

Market Forces How do the right products get to the right places, in the right quantities, and at the right prices?

Market Forces at Work Three main market forces supply and demand profit competition A market economy is also called a free market economy because market forces are free to influence economic decisions.

Supply and Demand Demand quantity of a product a consumer is willing and able to buy at a certain price Supply quantity of a product a supplier is willing to provide at a certain price (Continued)

Supply and Demand Individual demand quantity of a product demanded by an individual consumer Market demand sum of all individual demands for a specific product (Continued)

Supply and Demand Individual supply quantity of a product supplied by one supplier Market supply sum of all individual suppliers’ supply of a specific product

Effect of Price on Demand Law of demand when prices fall, demand will rise when prices rise, demand will fall The law of demand is based on market demand.

Law of Demand Demand will rise When prices fall (Continued)

Law of Demand Consumers buy more (demand rises) when price is low. Consumers buy less (demand falls) when price is high.

Effect of Price on Supply Law of supply when prices are high, supply will rise when prices fall, supply will fall The law of supply is based on market supply.

Law of Supply When prices are high Supply will rise (Continued)

Law of Supply Manufacturers will supply more of a product when its price is high because they will make more profit. Manufacturers will supply less of a product when the price falls because they will make less profit.

Constant Environment The laws of supply and demand describe what happens to supply and demand as prices change in a constant environment. A constant environment is one in which other factors do not change.

Changes in Demand Changes in demand can be caused by changes in marketing campaigns the economic situation social trends These changes can interfere with the laws of supply and demand.

Effect of Supply and Demand on Price Price affects supply and demand and gives us the laws of supply and demand. However, the level of supply and the level of demand interact to affect price.

Effect of Demand on Supply and Price Supply Falls $35 Demand Rises Suppliers can’t keep up with the rapid sale of basketballs. Price Rises Consumers start buying lots of basketballs. Suppliers raise the price of basketballs. Consumers pay the higher price. $20

Effect of Rising Demand on Supply and Price When demand is rising and supply falls, marketers raise prices. If demand is still high even though the price is high, suppliers will start making more basketballs and supply will rise.

Effect of Demand on Supply and Price Demand Falls Price Falls Supply Rises Suppliers lower the price to sell the soccer balls. Consumers are not buying soccer balls. Soccer balls pile up in the suppliers’ warehouses. $20 $15

Effect of Falling Demand on Supply and Price When demand is falling and supply rises, marketers lower prices. If demand is still low even though the price is low, suppliers will stop making soccer balls and the supply will fall further.

Effect of Supply on Price and Demand Price Falls Supply Rises Demand Rises The suppliers want to sell their product before it spoils. They lower the price of strawberries. Strawberries are in season. The berries are spoiling before consumers purchase them. The reduction in price increases consumers’ demand for strawberries. $4 $2

Effect of Rising Supply on Price and Demand For some items, like seasonal fruits, the supply rises rapidly, so marketers lower the price to sell the fruit faster In this situation, consumer demand rises with the lowered prices until the fruits are out of season, so the price then rises

Profit $ $ $ = - Profit motive is the drive to earn more profit. Costs and Expenses Sales Profit (Continued)

Profit What is your profit if your store sells $100 worth of merchandise and your costs are $75? Sales – Costs = Profit $100 – $75 = $25 Your profit is $25. (Continued)

Profit Three main ways to increase profit decrease costs or expenses increase productivity (the amount of product a worker produces per hour) increase sales (Continued)

Profit To increase profit, decrease costs and/or expenses. Think of your store with the $100 in sales. Reduce your costs to $25. What would your profit be? Sales – Costs = Profit $100 – $25 = $75 Your profit would be $75. (Continued)

Profit To increase profit, increase productivity. If workers produce more product per hour, you will have more products to sell. More products to sell means that you will have higher sales. Higher sales, with the same costs and expenses, mean higher profit. (Continued)

Profit To increase profit, increase sales. Think back to the “store” example. Suppose you sold $200 worth of goods, and your costs stayed at $25. What would your profit be? Sales – Costs = Profit $200 – $25 = $175 Your profit would be $175.

Competition Competition businesses competing with each other to get customers Competition results in better products better quality more services lower prices

Role of the Consumer Consumers (as a group) have a large impact on a market economy through the forces of supply and demand. (Continued)

Role of the Consumer If many consumers buy a product, it will probably succeed. If few consumers buy a product, it will probably fail. Ch4

Review Who controls a market economy? List the three main market forces. Describe the laws of supply and demand. What is a constant environment? What three factors can change demand? How is profit calculated? How do consumers influence a market economy?

Glossary Back command economy. Economy in which the national government makes all the economic decisions. competition. Contest between two or more businesses to get customers. demand. Quantity of a specific product that a buyer is able and willing to buy at a certain price, usually at a particular time and place. (Continued)

Glossary Back law of demand. When prices fall, demand will rise (in a constant environment). law of supply. When prices are high, supply will rise (in a constant environment). market demand. Sum of all the individual demands for a specific product, for a specific time period. (Continued)

Glossary Back market economy. Economy in which individuals answer the economic questions and market forces are allowed to operate. market supply. Sum of all the individual suppliers’ supply of a specific product, for a specific time period. (Continued)

Glossary Back mixed economy. Economy in which both the government and individuals are involved in making economic decisions. productivity. Amount of product a worker produces per hour (product/hour). profit motive. Drive to earn more profit. (Continued)

Glossary Back scarcity. Condition in which there are not enough resources to meet needs. supply. Quantity of a specific product that a supplier is willing to supply at a certain price. traditional economy. Economy in which the economic questions are answered by the elders based on the society’s traditions.