Chapter 2Chapter 2Theoretical Foundations:

Prices, Markets, and Management

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

Types of Economic SystemsTypes of Economic Systems

Laissez Faire Capitalism

Modern Mixed Economy

Democratic Socialism

Communism

Laissez Faire CapitalismLaissez Faire Capitalism

Ownership of Resources

Markets

Government Involvement

Modern Mixed EconomyModern Mixed Economy

Ownership of Resources

Markets

Government Involvement

Democratic SocialismDemocratic Socialism

Ownership of Resources

Markets

Government Involvement

CommunismCommunism

Ownership of Resources

Markets

Government Involvement

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

Determinants of DemandDeterminants of Demand

What are some determinants of the demand for a good or service?

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

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$

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

Market Demand CurveMarket Demand Curve

Summation of all individual demand curves in the market

Law of Demand Downward Sloping Determinants of Demand

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

Hypothetical Firm Supply Hypothetical Firm Supply CurveCurve

Quantity Supplied

Pri

ce

of

Pro

du

ct

Factors Affecting SupplyFactors Affecting Supply

What factors affect the supply of a good or service?

Factors Affecting SupplyFactors Affecting Supply

Resource PricesLabor CostsTaxesSubsidiesTechnology

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

Marginal CostMarginal CostThe additional or extra cost incurred in

producing one more unit of a good or service

MC = TC/ Q

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

P1

Q1

D

MC

S Curve for Firm is MC CurveS Curve for Firm is MC Curve

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

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.

Shift in Demand for ShoesShift in Demand for Shoes

DD00

SS

SS

PP11

PP00

QQ00 QQ

PP

What happened here?

QQ11

DD00

DD11

DD11

Shift in Supply of ShoesShift in Supply of Shoes

DD

DD

SS

SS

PP11

PP00

QQ00 QQ

PP

S’S’

What happened here?

QQ11

Effect of Price Controls Effect of Price Controls

SS

SS

Quantity of OilQQS S

DD

DD

QQD D

Controlled Maximum

Price

International MarketPrice

PP

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

Two Goals of SocietyTwo Goals of Society

Increase Incomes and Living Standards

Fairness and Equity in Income Distribution

Two Goals in Conflict

Conflict Between GoalsConflict Between Goals

Income Distribution Over Time

Poor Vs. Rich or

Impact on Income over Lifetime

Food Distribution in ChicagoFood Distribution in Chicago

How does it happen?

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

Environmental Analysis and Environmental Analysis and ForecastingForecasting

•Analyzing and Forecasting Environmental Change

•Describing the Current Environment

•Projecting Future Changes

Environmental Scanning

Step I - Define AreasStep I - Define Areas

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

Step II - Delineate TopicsStep II - Delineate Topics

External TopicsInternal Topics

Step III - Determine Time Step III - Determine Time Frame and Forecasting Frame and Forecasting

RequirementsRequirementsShort RangeLong Range

– Delphi Technique– Scenario Method

Step IV - Design and Step IV - Design and Implement StrategyImplement Strategy

External/Short-termExternal/Long-termInternal/Short-termInternal/Long-term

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

Step VI - Integrate into the Step VI - Integrate into the Organization Organization

Short-termLong-term

– Organizational Change– Inform Top Management

Poland CasePoland Case

Problems of a Socialistic SystemEverybody has moneyToo much money chasing too few goodsMoney becomes worthlessResort to barterLong lines for food

Poland CasePoland Case

Why did they have long lines?

How does food distribution under Communism compare to the system in the USA?

Poland CasePoland Case

How well can government controls replace the free enterprise system?

What is happening in Poland today?