Theoretical Foundations: Prices, Markets, and Management

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Chapter 2

• Theoretical Foundations Prices, Markets, and
  Management

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(No Transcript)
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Types of Economic Systems

• Laissez Faire Capitalism
• Modern Mixed Economy
• Democratic Socialism
• Communism

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Laissez Faire Capitalism

• Ownership of Resources
• Markets
• Government Involvement

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Modern Mixed Economy

• Ownership of Resources
• Markets
• Government Involvement

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Democratic Socialism

• Ownership of Resources
• Markets
• Government Involvement

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Communism

• Ownership of Resources
• Markets
• Government Involvement

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The Concept of Demand

• Demand is a Schedule of the different quantities
  of a good or service that a consumer is Willing
  and Able to purchase at each and every possible
  price

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Determinants of Demand

• What are some determinants of the demand for a
  good or service?

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Determinants of Demand

• Income
• Normal Goods and Services
• Inferior Goods and Services
• Price
• Price of Substitute Goods and Services
• Price of Complementary Goods and Services
• Attitudes and Tastes

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An Individuals Demand for Beer
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The Law of Demand

• The lower the price, the more of a good or
  service that will be purchased, the higher the
  price, the less that will be bought

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Market Demand Curve

• Summation of all individual demand curves in the
  market
• Law of Demand
• Downward Sloping
• Determinants of Demand

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Supply

• Supply is a schedule of the different quantities
  of a good or service that a seller is ready and
  willing to sell at each and every possible price

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Hypothetical Firm Supply Curve
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Factors Affecting Supply

• What factors affect the supply of a good or
  service?

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Factors Affecting Supply

• Resource Prices
• Labor Costs
• Taxes
• Subsidies
• Technology

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Market Supply vs. Firm
P
S market
Q
P firm 2

• Where do weget S curve?
• Summation of supply curves for each firm in
  market or industry

S firm 2
Q firm 2
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Marginal Cost

• The additional or extra cost incurred in
  producing one more unit of a good or service

MC ?TC/ ?Q
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Hypothetical Firms Marginal Cost Curve
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S Curve for Firm is MC Curve
D
P1
MC
Q1
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Price and Quantity Determinationin a Competitive
Marketplace
Price
D
S
P
E
PE
P
D
S
QE
Quantity
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Role of PricesIn a Free Enterprise System (I)

• Transmits Information ...
• To producers, consumers, resource suppliers,
  labor
• Signals to produce more or less, to enter new
  markets, produce new products, etc.

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Shift in Demand for Shoes
D1
S
D0
P
P1
What happened here?
P0
D1
D0
S
Q0
Q
Q1
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Shift in Supply of Shoes
S
D
P
S
P1
What happened here?
P0
D
S
Q0
Q
Q1
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Effect of Price Controls
D
S
P
International Market Price
Controlled Maximum Price
S
D
QS
QD
Quantity of Oil
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Role of Prices (II)

• Provides Incentives ... to consumers, producers,
  labor and owners of productive resources
• Allocate Resources ... alternative ways to
  provide goods and services
• Affect Distribution of Income

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Two Goals of Society

• Increase Incomes and Living Standards
• Fairness and Equity in Income Distribution
• Two Goals in Conflict

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Conflict Between Goals

• Income Distribution Over Time
• Poor Vs. Rich or
• Impact on Income over Lifetime

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Food Distribution in Chicago

• How does it happen?

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The Invisible Hand of the Marketplace

• Adam Smith, 1776 ...Wealth of Nations
• Individuals pursue their own self interest ...
  greater good of society is served
• Individuals moved by an Invisible Hand to
  promote social welfare
• Example Food distribution

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Environmental Analysis and Forecasting
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Environmental Scanning

• Analyzing and Forecasting Environmental Change
• Describing the Current Environment
• Projecting Future Changes

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Step I - Define Areas
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Define Areas to Study

• Primary Involvement - Exchange relationships or
  marketplace relationships
• Secondary Involvement -Relationships, activities
  and impacts that are ancillary or consequential
  to primary involvement

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Step II - Delineate Topics

• External Topics
• Internal Topics

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Step III - Determine Time Frame and Forecasting
Requirements

• Short Range
• Long Range
• Delphi Technique
• Scenario Method

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Step IV - Design and Implement Strategy

• External/Short-term
• External/Long-term
• Internal/Short-term
• Internal/Long-term

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Step V - Analyze Data

• Cross Impact Analysis

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Step VI - Integrate into the Organization

• Short-term
• Long-term
• Organizational Change
• Inform Top Management

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Poland Case

• Problems of a Socialistic System
• Everybody has money
• Too much money chasing too few goods
• Money becomes worthless
• Resort to barter
• Long lines for food

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Poland Case

• Why did they have long lines?
• How does food distribution under Communism
  compare to the system in the USA?

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Poland Case

• How well can government controls replace the free
  enterprise system?
• What is happening in Poland today?