Comments please.
Paper # 3
By:
Emily Pieren
Western Oregon University
Monmouth, Oregon
Chapter 7
Consumer sovereignty has to do with the fact that markets change based on what the
consumers want. If consumers want more of a certain thing the market will make more; if the
demand decreases for a certain product, the market will make less. This system sounds simple,
but it is not. It takes 6 steps to respond to the demand of supply. The first three steps are quick,
but the last 3 can take a while. The diagram below is of the individual producer and the other
represents the supply and demand confronting the traders of the commodities exchange.
This diagram describes how a market demand curve is constructed. Along the vertical
axis we set a price, from that point you make a horizontal line (a,b,c), which illustrates the
demand of each individual. At the far right, the individual demands are added up moving the
curve right. If you were to plot the point of more individuals, this would show the market
demand curve. The more buyers you have, the more the demand curve will move right. If there
is a drop in the number of buyers, the curve will move left.
A commodity market has a lot of buyers and suppliers; meaning that the market
diagram is highly compressed. Consequently, there would need to be a big increase or decrease
in the number of buyers or suppliers to have any effect on the supply curve. A combined
change would be needed in the buyers and suppliers overtime to shift the curve even a little
bit.
When the market level supply and demand are equal, this is called long-run equilibrium.
The company is making a profit so it doesn’t feel the need to change its output. It is not
attracting any new suppliers because the profits are low enough.
The first step in the sixth step process is an increase in demand. As demand increases,
the price of the product also increases in order to keep supply and demand equal. When this
happens, some buyers will lessen their demand, while suppliers increase their supply. This is
not beneficial for the consumers because as their demand goes up, so does the price. They
don’t realize that suppliers have to increase the price when the demand increases, or else they
would lose their profit margin. When prices go up, this invites competition to enter the picture
once again lowering the prices. There are times when competition can be blocked by new firms
entering the industry, or by a firm adding on to its business. When this happens, buyers won’t
see prices lower.
In the figure below, you are seeing what is called constant-cost industry; meaning that
suppliers are maintaining their same prices regardless of the increase in the industry. When this
happens, nothing has changed for the supplier even though demand increased.
In the figure below, you are seeing an increase in price as demand rose. When a
company runs into increased cost for supplying output to ensure that they are still making a
positive profit, they will put the cost on the buyer. This is called increasing-cost industry.
The last model is called decreasing-cost industry. This is where a firm has been able to
increase output while using money saving techniques allowing for the firm to decrease cost and
still make a positive profit. In this case, buyers get more output and a lower price. In all three
situations the most important factor is the ability to have new competition enter the market. In
order for competition to enter the market, their needs to be an increased demand and a spike
in the price. When competition enters, prices once again drop. So when competition is blocked,
the buyer will have to deal with high prices. As consumers, when prices rise we are so
concerned with getting them down as soon as possible, we aren’t allowing for competition to
do its work and lower the prices on its own.
On the other side of the spectrum, when demand decreases, businesses start to see
negative profits and as a result begin to leave the industry; thus creating a shortage of products
in the market. To make the supply and demand equal again, the traders raise prices allowing for
firms to increase output. Once entry stops, the industry goes back to normal and the individual
supplier is back where he started.
When costs increase, suppliers decrease output which forces traders to raise prices in
order to keep supply and demand equal. Although the price has risen to accommodate for the
increase of cost, it won’t be enough and firms will start leaving the market until the supply
market has been reduced enough for prices to increase.
Chapter 8
Goods coming from different sources but look the same, (i.e. grain, sugar) and are called
commodities. Goods with unique styles, (i.e. guns, bicycles) are not commodities and make up
the biggest share of goods.
Having your own brand gives you the opportunity to earn more and, at the same time,
gives the consumer more chance to find a good they like and can afford. When everything is
much the same, there is not such a large consumer base. In commodities there is a more
constant price. When you are the only one making the item, you have more price control but
are still controlled by the old supply and demand law. If you happen to be the only dog on the
block, you can enjoy a larger profit margin. When there is money being made you will have
more companies starting up businesses. As more companies start producing similar items, your
profits will go down. When the profits go down it will drive some companies out of business.
It is sometimes in the best interest of the government to help a company that is going
out of business. This is because it helps the economy by keeping jobs for people, and supplying
a needed product. If there was a better good that was needed or could be produced, this
would not be a good government move. If this is the case, there needs to be help provided to
build something different and retrain people. There always has to be enough financial incentive
to encourage companies to make jobs, which grows the economy.
When it comes to the manufacturing world, there are three ways to do it best. The first
one is being able to produce the item at the lowest cost to you. The second one is using the
factory you have at its best ability (optimum efficiency) to produce the item. Now, the third
one is using the latest technology in your plant.
When you have a good that everyone needs and uses, there are going to be many more
people in that field producing it. No one making the product is going to make huge sums, but it
does keep the prices down for those who buy them items. It is really hard in the business world,
with all the different factors entering in, to stay the same as far as profit, efficiency, and
technology. Figure 8-2
Making a product that is different can make it harder to be efficient in making it,
compared to products that are much the same. The product’s ability to give more choices and
please people still makes it a good deal. There always has to be a large enough profit for the
manufactures to increase production.
There comes a time when there are enough companies producing that the supply and
demand is equal. Those in business will have to supply the right amount to be profitable and
there are not enough profits to encourage others to enter the game.
A change will occur again when the supply demand changes. More demand will mean
more profit and more profit will mean more people entering the market. We find production
following what the buyer wants and demands. This see-saw continues depending on demand.
If rising costs come to the company to produce a product due to pay increases,
environment laws, money exchange rates, and these increase faster than what the company
can sell their product for, the business will have to leave this field of work. This will result in,
again, the right amount of plants being left to meet demand and a profit again.
The whole ball game revolves around making money and keeping losses to a
manageable level. This will continue to change depending on demand of the product. Meaning
you and me, the consumer, has power in this crazy world!
Chapter 9
For a firm to achieve profit maximization would be for the firm to choose the output and
to charge the highest price possible for that output, this doesn’t happen. Instead, the output is
determined by the supplier and the demand determines what the price will be. Merchants use
a method called “markup pricing,” where they set their prices and have demand decide their
sales. There is a problem when the price is marked up too much and when the price isn’t high
enough. When the price is too much the firm won’t be able to sell all of its output; when the
price is low there would be no way to maximize profits. The choice of what price you choose is
the most critical. Once you choose a markup price, you must always be ready to change it
because the market changes and you need to be able to change with it to be able to maximize
profits.
When a firm creates a new product, they will not know what price to set on their
product or how big their output should be. They must either rely on market research (which is
expensive), experimentation where they can receive reliable feedback, or by starting with a low
markup and a low projection for sales. If things go well and products are being sold rapidly,
then the firm can raise their price and output.
In the marketplace, there is price differentiation where buyers pay different prices for
the same product. This is commonly seen in the entertainment venue. For instance: theaters,
airline flights, and games. When you see prices are lower for senior citizens or kids under 12,
this is done because it is known that different age groups are more sensitive to price than
others. By lowering the price, they are actually making more money because more people are
willing to come. Stores also use coupons which allow them to have high prices for their
products because they offer discounts. However, only the price sensitive people actually use
coupons so once again they are making a profit.
A monopoly is a supplier who does not have competition. Monopolies behave the same
as any supplier in that they are attempting to achieve the maximum profit for their product.
Often, new products are protected by competition through copyrights and patents which blocks
competition. Without this protection, people would find it too risky to introduce new products
into the market place. Public services are monopolized to reduce multiple businesses
attempting to deliver the same product. Also public services would be more costly if there were
smaller businesses being used instead of big monopolies.
Collusion is the idea that if all suppliers decide to ban together instead of competing
they could maximize their profits. Groups who do this are called Cartels and are illegal in the
United States. When suppliers work alone they know that they individually can’t do anything to
change the price of a product. But if suppliers work together, they will be able to change the
price in a big way. This has been done by OPEC with oil sales. There is an opportunity for this
system to fail because all individual suppliers will see the ability to maximize their own profits
and will then cheat. When too many suppliers cheat, it will result in the profit becoming zero.
Externalities are the results of things being affected other than the buyer and the seller.
A negative effect would be pollution caused by factories making products. This not only affects
the company and the buyer, but also everyone who is dealing with the effects of the pollution.
Then you will see a pollution tax being stuck on the supplier which will in turn raise the price of
the product being manufactured. A positive externality is K-12 education. When people are
better educated they tend to make more money, and contribute to society in a more
productive way.
Historically, because of high quality labor and capital equipment, the United States has
had low labor costs even though wages are higher than most places. But we are seeing this
slowly slip away due to China and India’s huge population and economic growth. U.S producers
have seen this and are able to move their production out of the U.S into these lower labor cost
countries. This in turn increases China and India’s economic growth while many jobs have left
the U.S because businesses saw it as a way to increase their profits and put themselves in the
middle of the new booming markets.