Markets have played a pivotal role in the decisions that people have made from the beginning. To understand markets is to understand the human story. Having this understanding of markets nd prices will make them savvy consumers, not "victims" of the system. Ideally, when students notice price changes they will recognize that supply or demand has changed and wonder which and why. If there is a flood in the Midwest that wipes out much of the winter wheat crop, supply will fall, the product will become scarcer, and the price will rise. If buyers decide that the laptop is not as desirable as it once was, demand will fall, the laptop will become less scarce, and the price will fall. The relative scarcity of a product and, therefore, the price of a product, changes if something changes with buyers or sellers in the market. Prices reflect the relative scarcity of a product and provide information to buyers and sellers. What makes some products scarcer than others and some products less scarce than others is the relationship between buyers and sellers for that product compared to all others. Relative scarcity is determined by the interaction of supply and demand for a particular product. A yacht is scarcer than a pencil, a diamond is scarcer than the same quantity of water, and a car is scarcer than a bicycle. It measures how scarce a good or service is relative to all incomes and all other goods and services. A price is nothing more than a unit of measure. If someone were asked how tall you are, you might answer, "Five feet, eight inches." If you were asked how much you weighed, you might reply "145 pounds." If you were asked how scarce your cup of coffee is, you could reply,"$2.25." Just as feet, inches, and pounds are units of measurement, so too are dollars and cents or Euros or Rupee or Pesos. The price is the measure of how scarce one product is compared to all other products and all incomes. This competition of sellers against sellers and buyers against buyers determines the price of the product. In a competitive market, sellers compete against other suppliers to sell their products and buyers bid against other buyers to obtain the product. After considering production costs, suppliers will supply more of a product if the price is higher and less of the product if the price is lower. Once all of the considerations above (incomes, tastes, costs of production) are accounted for, buyers will buy more of a product at lower prices and less of a product at higher prices. So prices are incentives for sellers and for buyers. Sellers who expect to earn a profit for supplying laptops will do so buyers who expect to get more pleasure from the laptop than the money they give up will buy a laptop. They can afford to sell less costly items at lower prices and higher cost items only at higher prices.Ä«uyers and sellers respond to incentives. Sellers will be influenced by their costs of production. In addition, buyers' willingness and ability to buy will be influenced by their incomes, their tastes, conditions at other auctions for other products, and their expectations about the price and availability of similar products in the future. So the number of buyers in the room and the number of sellers in the room influence the price of the products. Prices are likely to be higher if there are only a few sellers in the room and lower if there are many. Prices are likely to be higher if there are many buyers in the room and lower if there are few. Buyers look over the products and the bidding begins. Imagine an auction where buyers and sellers come together to exchange products. How does the pricing issue get resolved? Where do prices come from? The quandary is that buyers want the lowest price possible and sellers want the highest price possible. Markets are simply interactions between buyers and sellers where the mutual goal is to make a trade. So people have been exchanging since time began. Because one person's trash is another person's treasure, two people can exchange and both will benefit. Understanding the factors that determine prices will not only make us better decision makers as consumers, but will also make us better employees by understanding what impacts the prices our employer can set. In addition, a business needs to set prices that pay all its costs and allow it to make a profit if it is to survive. To the contrary, consumers "control" prices and vote with their feet. Many students and adults think a business can set whatever prices it wants.
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