trade and markets

Jean Lee C. Patindol, c2011

Trade and Markets


The Economy

Government

ConsumersProducers

taxes

services

taxes

services

Produce goods and services,

Receive payments

Make payments,

Receive goods and services

National Economic GoalsShort-term Full employment – use

all the resources available most efficiently

Long-term Growth –increase

availability of resources, increase in productivity of resources

Equitable distribution of income

Economic stability Economic sovereignty


Economic Systems As a result of scarcity,

every society has to make basic choices: What to produce? How much to

produce? How (includes when,

where) to produce? For whom to produce?

A more fundamental choice: Who will make these choices? What economic systems will result out of this choice? Tradition: choices are

dictated by past experience Command: choices

dictated by a central authority

Market: choices are determined by producers and consumers through the price system



Trade

The voluntary exchange of goods and services The decision to trade is made because the

parties involved in the exchange expect to gain. When one or both the trading partners believe they can no longer gain from trading, the exchanges will stop.

When people buy something, they value it more than it costs them; when people sell something, they value it less than the payment they will receive.


Value vs. Cost

Usefulness of something acquired or to be acquired

May or may not be reflected in the price of that something

What it takes to acquire something

Usually influences price-setting

Includes monetary (price-based) and non-monetary (usually non-price-based) costs/ transaction costs (e.g., time, attention, energy, relationships, goodwill, good name)


Prices

Provide information – as a basis for evaluating the relative value and cost of a good

Act as incentives – encourages sellers to produce or not; and buyers to buy or not

Act as rationing mechanism – the good goes to those who can afford them


How Are Prices Determined in the Market? Cost of Production Theory – based on Labor

Theory of Value: the value of a commodity in exchange (or price) depends entirely on the amount of labor expended in its production; add up all costs to produce something, then add desired profit margin (Cost concept)

Utility Theory: satisfaction or usefulness to the buyer or consumer is the determining factor for the price of a good (Value concept)


Markets Anywhere a product or service is bought or sold; the result of an interaction

between supply and demand

A market economy attempts to answer the 4 fundamental economic questions/choices through the system of prices

Based on 2 behavioral assumptions about buyers and sellers: Exchange – the activities of buying and selling in the market; prices are

established as a result of the interactions of buyers and sellers Rationality – self-interest; the “natural” behavior of the producer trying

to maximize profits by selling goods at the optimum prices and of the consumers trying to maximize utility by buying commodities at the best possible prices

2 types: Organized/formal: where buyers and sellers know there is a certain

product for sale at a particular price Unorganized/informal: where no one is sure about what is for sale nor

what the price is


Market Considerations

Location Size of market geographically Amount of competition Kind of product offered for sale Cost of providing the product or service Advertising of product Size of firm and ability to produce the product/

economies of scale Supply and demand for the product


Pure or Perfect Competition

Large market Identical or standardized products Independence of buyers and sellers – no control

or influence over price Reasonably informed buyers and sellers – non-

price competition Free access to the market – people can enter or

leave at no cost or loss


Pure or Perfect Monopoly

Where a buyer or seller has total control over the market Characteristics:

A single seller or a single buyer No entry – barriers prevent entry into the market No good/product substitutes Control of market prices and market No competition

Types: Natural: competition is not desirable or technically possible (ex.: talent,

national parks) Geographical – monopoly because of location Technological (ex.: patents, copyrights) Government


Imperfect Competition

All types of market conditions between pure monopoly and pure competition based on non-price competition

Product competition: Real differences: quality, atmosphere, cleanliness,

refunds with no questions, service, warranties, discounts, etc.

Fancy: promises, gimmicks, color, slogans, styles, etc.


4 Types of Competitive Markets Near pure competitive market – highly competitive where product

differentiation is very difficult and most people in this market condition must accept the market price (ex.: farm produce)

Monopolistic competition – highly competitive market where many small firms compete over product differences rather than price, with smaller profit margins (ex: mall boutiques)

Oligopolistic competition – a market condition where weak and strongly shared monopolies compete mainly over product differences rather than price. Very few firms compete in this market and there is a degree of concentration of industries (ex.: cellphone companies)

Near pure monopoly – there is an absence of competition and there would be dominance in this market without government regulation of the industry (ex.: oil companies)


Feature/Type Near Pure Competit

ion

Monopolistic Competit

ion

Oligopoly Monopoly

Level of Competition

Very high High Few firms None

Product Differentiation

Very difficult Small firms compete over product differences

Yes Product monopoly

Buyer/ Seller Power

Buyer Buyer and Seller

Seller Seller

Price Competition

Yes Somewhat X X

Need for Advertising

Maybe Yes Less Need X

trade and markets

Business

price system jean lee

markets jean lee

economy jean lee

good value concept jean

monetary price

economic systems

market prices

labor theory of value