chapter 2 theoretical foundations: prices, markets, and management
TRANSCRIPT
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Chapter 2Chapter 2Theoretical Foundations:
Prices, Markets, and Management
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UNDERLYING FORCES Demographics, Beliefs, Values, Cultures, International Events,
Discoveries, Resources, Natural Events
Societal Element Changes Energy and the Physical
Environment Labor & Human Resources Technology Economic Climate Regional & Local Issues International Trade
Public Sector Response Regulation Taxation Spending Provision of Services
Marketplace Response Prices Quantities Produced Product Quality Costs of Production
Business Response Managerial Decision-Making Strategy Implementation
Political System
Political System
Market System
Market System
Social Involvement- Business Social Responsibility
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Types of Economic SystemsTypes of Economic Systems
Laissez Faire Capitalism
Modern Mixed Economy
Democratic Socialism
Communism
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Laissez Faire CapitalismLaissez Faire Capitalism
Ownership of Resources
Markets
Government Involvement
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Modern Mixed EconomyModern Mixed Economy
Ownership of Resources
Markets
Government Involvement
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Democratic SocialismDemocratic Socialism
Ownership of Resources
Markets
Government Involvement
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CommunismCommunism
Ownership of Resources
Markets
Government Involvement
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The Concept of DemandThe 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 DemandDeterminants of Demand
What are some determinants of the demand for a good or service?
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Determinants of DemandDeterminants 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 Individual’s Demand for An Individual’s Demand for BeerBeer
$-
$0.50
$1.00
$1.50
$2.00
$2.50
0 2 4 6 8 10
Glasses Demanded
Pri
ce
pe
r G
las
s
Glasses Price/ glass
8 0.40$ 6 0.80$ 4 1.20$ 2 1.60$ 1 2.00$
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The Law of DemandThe 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 CurveMarket Demand Curve
Summation of all individual demand curves in the market
Law of Demand Downward Sloping Determinants of Demand
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SupplySupply
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 Hypothetical Firm Supply CurveCurve
Quantity Supplied
Pri
ce
of
Pro
du
ct
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Factors Affecting SupplyFactors Affecting Supply
What factors affect the supply of a good or service?
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Factors Affecting SupplyFactors Affecting Supply
Resource PricesLabor CostsTaxesSubsidiesTechnology
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Market Supply vs. FirmMarket Supply vs. Firm
Where do weget “S” curve?– Summation of supply curves for
each “firm” in “market” or “industry”
Q firm 1
P firm 1
S firm 1
Q firm 2
P firm 2
S firm 2
Q
P
S market
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Marginal CostMarginal CostThe additional or extra cost incurred in
producing one more unit of a good or service
MC = TC/ Q
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Hypothetical Firm’s Marginal Hypothetical Firm’s Marginal Cost CurveCost Curve
$0.00$0.20$0.40$0.60$0.80$1.00$1.20$1.40$1.60$1.80
480 500 520 540 560
Quantity Produced
Pri
ce, C
ost
MC
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P1
Q1
D
MC
S Curve for Firm is MC CurveS Curve for Firm is MC Curve
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Price and Quantity Price and Quantity DeterminationDetermination
in a Competitive Marketplacein a Competitive MarketplaceDD
DDSS
SS
Quantity
Pri
ce
EE
P’P’
P’P’
PPEE
QQEE
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Role of PricesRole of PricesIn a Free Enterprise System (I)In 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 ShoesShift in Demand for Shoes
DD00
SS
SS
PP11
PP00
QQ00 QQ
PP
What happened here?
QQ11
DD00
DD11
DD11
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Shift in Supply of ShoesShift in Supply of Shoes
DD
DD
SS
SS
PP11
PP00
QQ00 QQ
PP
S’S’
What happened here?
QQ11
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Effect of Price Controls Effect of Price Controls
SS
SS
Quantity of OilQQS S
DD
DD
QQD D
Controlled Maximum
Price
International MarketPrice
PP
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Role of Prices (II)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 SocietyTwo Goals of Society
Increase Incomes and Living Standards
Fairness and Equity in Income Distribution
Two Goals in Conflict
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Conflict Between GoalsConflict Between Goals
Income Distribution Over Time
Poor Vs. Rich or
Impact on Income over Lifetime
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Food Distribution in ChicagoFood Distribution in Chicago
How does it happen?
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The Invisible Hand of the The Invisible Hand of the MarketplaceMarketplace
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 Environmental Analysis and ForecastingForecasting
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•Analyzing and Forecasting Environmental Change
•Describing the Current Environment
•Projecting Future Changes
Environmental Scanning
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Step I - Define AreasStep I - Define Areas
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Define Areas to StudyDefine 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 TopicsStep II - Delineate Topics
External TopicsInternal Topics
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Step III - Determine Time Step III - Determine Time Frame and Forecasting Frame and Forecasting
RequirementsRequirementsShort RangeLong Range
– Delphi Technique– Scenario Method
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Step IV - Design and Step IV - Design and Implement StrategyImplement Strategy
External/Short-termExternal/Long-termInternal/Short-termInternal/Long-term
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Step V - Analyze DataStep V - Analyze DataCross Impact Analysis
T1 T2 T3
Television technologies (probability, year)
T1 interactive (.9,2010)
Enhanced 50% in 3 years
Enhanced 50% in 3 years
T2 digital (.7, 2010)
-10% in 2 years -60% in 2 years
T3 HDTV (.8, 2010)
-10% in 2 years Enhanced 25% in 2 years
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Step VI - Integrate into the Step VI - Integrate into the Organization Organization
Short-termLong-term
– Organizational Change– Inform Top Management
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Poland CasePoland Case
Problems of a Socialistic SystemEverybody has moneyToo much money chasing too few goodsMoney becomes worthlessResort to barterLong lines for food
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Poland CasePoland 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 CasePoland Case
How well can government controls replace the free enterprise system?
What is happening in Poland today?