Goal for the day: To understand how competition (or lack thereof) affects price
We started today watching a short video of Stephen Levitt relaying an anecdote about the economic concept of price.
We then played the Silver Market game, where the class was divided into buyers and sellers and you were given cards to negotiate prices. We played five rounds of this game and Keagan ended up making the most money.
After break, we first discussed the definition of a "market": an institution that allows for communication and exchange between buyers and sellers. This means that our school store is "a market." Amazon.com is a market. The "real estate market" is an imaginary space across which buyers, sellers, and realtors communicate. The "AHS market" implies communication between members of the AHS community and another individual, vendor, or firm.
Within our "silver market," prices converged during our game on an equilibrium price: $4.20. This was an example of a perfectly competitive market. Perfectly competitive markets require the following:
· Numerous small sellers and buyers
· All units of the good or service are identical
· No barriers to enter or exit the market
· There is perfect information
· Production is not subject to economies of scale
· People are making decisions on price - perfectly elastic demand curve
You didn't have perfect information on prices, but you definitely picked up that some prices were too high or too low. In perfectly competitive markets, prices find a natural level based on supply and demand. As a business in a perfectly competitive market, you don't have a lot of room to set prices. The market sets prices over the long run as supply and demand find their equilibrium. Over the short run, you make the most profit by making your price equal to marginal cost.
What is marginal cost? Marginal cost is the cost of producing one more unit of something. If it costs you a $5.00 to produce five cups of coffee and it costs $6.00 to produce six cups, the marginal cost is $1.00. In a perfectly competitive market, you maximize your profit when MC = Price.
But most markets aren't perfectly competitive. Only perhaps the stock market and the market for unskilled labor approaches perfect competition.
In general, for markets to work the way they're supposed to, you need the following conditions:
• Private property enforced - not talking about common property
• People are free to make their own decisions
• Trust between parties
• Infrastructure to facilitate exchange - roads, etc.
• Some widely accepted medium of exchange - money, time - durable store of value and minimal handling and storage costs
• Did everyone buy based on price? (But what if at the FM I buy Jerry's tomatoes even if Tom's are cheaper because I like Jerry?)
• Prices represent all costs - no externalities or transaction costs
• Market power - ability to influence the market
If these conditions don't hold, you can experience "market failure."
What is market power? This is when the behavior of one or a few firms influence the market. Pure monopolies occur when there is only one seller, there are no good substitutes for the good and there are barriers to other firms entering the marketplace. These barriers can be economic, legal, or illegal. With a pure monopoly, a firm controls the supply curve for the entire market. They can move the supply curve at will to the level that will give them the greatest profit. If you are a monopoly, you earn the most profit by making marginal cost equal to marginal revenue and letting this determine how much to produce. If you know how much buyers will pay with this amount in the marketplace, you know the best price for profit. A local example of a monopoly is the train.
There are also important variations. Monopolistic competition is when there are closely related goods that aren't exactly the same. An example is the fast food industry. There are a lot of similar project but none are exactly the same. In this case, you still put MC equal to MR to figure out quantity of product and take the price off the demand curve at that production level.
An oligopoly is when there are just a few firms that control the market. Here the price fluctuates according to what the competition is charging.
Here is a table that summarizes these different types of markets. What type of market is your product operating within? This was the last activity, circling the portion of this table that corresponds to the market for your product.
Homework due Thursday, January 29th
None
We started today watching a short video of Stephen Levitt relaying an anecdote about the economic concept of price.
We then played the Silver Market game, where the class was divided into buyers and sellers and you were given cards to negotiate prices. We played five rounds of this game and Keagan ended up making the most money.
After break, we first discussed the definition of a "market": an institution that allows for communication and exchange between buyers and sellers. This means that our school store is "a market." Amazon.com is a market. The "real estate market" is an imaginary space across which buyers, sellers, and realtors communicate. The "AHS market" implies communication between members of the AHS community and another individual, vendor, or firm.
Within our "silver market," prices converged during our game on an equilibrium price: $4.20. This was an example of a perfectly competitive market. Perfectly competitive markets require the following:
· Numerous small sellers and buyers
· All units of the good or service are identical
· No barriers to enter or exit the market
· There is perfect information
· Production is not subject to economies of scale
· People are making decisions on price - perfectly elastic demand curve
You didn't have perfect information on prices, but you definitely picked up that some prices were too high or too low. In perfectly competitive markets, prices find a natural level based on supply and demand. As a business in a perfectly competitive market, you don't have a lot of room to set prices. The market sets prices over the long run as supply and demand find their equilibrium. Over the short run, you make the most profit by making your price equal to marginal cost.
What is marginal cost? Marginal cost is the cost of producing one more unit of something. If it costs you a $5.00 to produce five cups of coffee and it costs $6.00 to produce six cups, the marginal cost is $1.00. In a perfectly competitive market, you maximize your profit when MC = Price.
But most markets aren't perfectly competitive. Only perhaps the stock market and the market for unskilled labor approaches perfect competition.
In general, for markets to work the way they're supposed to, you need the following conditions:
• Private property enforced - not talking about common property
• People are free to make their own decisions
• Trust between parties
• Infrastructure to facilitate exchange - roads, etc.
• Some widely accepted medium of exchange - money, time - durable store of value and minimal handling and storage costs
• Did everyone buy based on price? (But what if at the FM I buy Jerry's tomatoes even if Tom's are cheaper because I like Jerry?)
• Prices represent all costs - no externalities or transaction costs
• Market power - ability to influence the market
If these conditions don't hold, you can experience "market failure."
What is market power? This is when the behavior of one or a few firms influence the market. Pure monopolies occur when there is only one seller, there are no good substitutes for the good and there are barriers to other firms entering the marketplace. These barriers can be economic, legal, or illegal. With a pure monopoly, a firm controls the supply curve for the entire market. They can move the supply curve at will to the level that will give them the greatest profit. If you are a monopoly, you earn the most profit by making marginal cost equal to marginal revenue and letting this determine how much to produce. If you know how much buyers will pay with this amount in the marketplace, you know the best price for profit. A local example of a monopoly is the train.
There are also important variations. Monopolistic competition is when there are closely related goods that aren't exactly the same. An example is the fast food industry. There are a lot of similar project but none are exactly the same. In this case, you still put MC equal to MR to figure out quantity of product and take the price off the demand curve at that production level.
An oligopoly is when there are just a few firms that control the market. Here the price fluctuates according to what the competition is charging.
Here is a table that summarizes these different types of markets. What type of market is your product operating within? This was the last activity, circling the portion of this table that corresponds to the market for your product.
Homework due Thursday, January 29th
None