Lesson 1

Introduction to Market and Prices

Economy and Function of Economy

 It is a system which provides people, the means to work and earn a living.

ECONOMY

 PRODUCTION
 CONSUMPTION
 CAPITAL FORMATION

Economics and Scarcity

 The main reason for study of economics can be simplified to a single word SCARCITY

Scarcity – refers to the limitation of supply in relation to demand for a commodity.

Economics is concerned with selection of resources under conditions of scarcity.

Economizing of Resources and Factors of Production

 Refers to making optimum use of the available resources.

FACTORS OF PRODUCTION (FOP)

 Land
 Capital
 Labor
 Entrepreneurship

Economic Problem and Reasons

 It is a problem of CHOICE involving satisfaction of unlimited wants out of limited resources having alternative
uses.
1. SCARCITY OF RESOURCES – Resources are limited in relation to their demand and economy cannot produce all
what people want.
2. UNLIMITED HUMAN WANTS – Human wants are never ending, i.e. they can never be fully satisfied. As soon as
one want is satisfied, another new want emerges.
3. ALTERNATIVES USES – Resources are not only scarce, but they can also be put to various uses. It makes choice
among resources more important.

Economics and Microeconomics

Economics – is a social science which studies the way a society chooses to use its limited resources, which have
alternative uses, to produce goods and services and to distribute them among different groups of people.

MICROECONOMICS

Factors that influence individual economic choices

Decisions of individual firms
Decisions of individual consumers
How demand and prices are determined in individual markets
Decisions of individual households
Labor Economics

Market and Feature of Market

Generally market is the place where buyers and sellers are physically present and finalize the transaction.

Prof Stonier and Prof Hague:-

By a market economist mean any organization whereby buyers and sellers of a goods are kept in close touch with
each other.

FEATURE OF MARKET:

• Buyers and Sellers:- Buyers and Sellers are must for market. In Transaction Physical Presence is not necessary.

• One Area:- Denote to a area or a region in which no of buyers and sellers are scattered. They are connected with
one another via brokers, agents, letters. Etc.

• One Commodity:- For the existence of a market there should be at least one commodity like Wheat, vegetables,
etc and the market is termed as wheat market, vegetables market and so on.

Competitive and Non-competitive Market

• Perfect Competition:- According to Prof. Coornot, market must posses the characteristic of perfect competition
where in buyers and sellers are free to enter in the market.

• One Price:- In Perfect competition between buyers and sellers. The market area should have one price only.

• Competitive market

 Many buyers and many sellers, each has a negligible impact on price

• Non-Competitive Market

 Monopoly
 Seller has impact on price

Market Price – The current price at which a good or service can be purchased or sold.

Theory of Price – An economic theory that states that the price for a specific good or service is determined by the
relationship between its supply and demand at any given point.
 Lesson 2

Basics of Supply and Demand

 In the United States, the forces of supply and demand work together to set prices.
 Demand is the desire, willingness, and ability to buy a good or service.
 Supply can refer to one individual consumer or to the total demand of all consumers in the market (market
demand).
 Based on the definition, which of the following do you have a demand for?

 A demand schedule is a table that lists the various quantities of a product or service that someone is willing to
buy over a range of possible prices.

Factors Affecting Demand

 How strong is the need or want?

 How available is the supply of products and services to satisfy individual needs?
 What alternative products could satisfy consumer needs?

Law of Demand

 When the price of a product is increased, less will be demanded

 Demand curve – shows the relationship between price and the quantity demanded

Demand Schedule

 A demand schedule can be shown as points on a graph.

 The graph lists prices on the vertical axis and quantities demanded on the horizontal axis.
 Each point on the graph shows how many units of the product or service an individual will buy at a particular
price.
 The demand curve is the line that connects these points.

Demand Curve for Widgets

 The demand curve slopes down.

 This shows that people are normally willing to buy less of a product at a high price and more at a low price.
 According to the law of demand, quantity demanded and price move in opposite directions.

 We buy products for their utility – the pleasure, usefulness, or satisfaction they give us.
 What is your utility for the following products? (Measure your utility by the maximum amount you would be
willing to pay for this product)

Law of Supply

 More will be supplied as prices increase.

 Supply curve graph of the relationship between price and quantity supplied

Behind the Demand Curve

 A demand curve is drawn under the assumption of ceteris paribus all other important factors remaining
unchanged.
 Factors to be considered may be remembered by D= D(PINTE)

Factors Affecting Market Demand

P = Prices

I = Income

N = number of buyers

T = tastes or preferences

E = expectations about future prices and market conditions

Prices of Substitutes

 What would happen to the demand for Peanuts if the price of pretzels fell?
 The demand for Peanuts would probably fall since people would buy pretzels instead.
 There is a positive relationship between the demand for a good and the price of its substitutes.
 Thus an increase in the price of a substitute will increase the demand for the good
 And a decrease in the price of a substitute will decrease the demand for the good

Price of Complementary

 Complementary goods are goods used together

 What if the price of beer goes up? What ought to happen to the demand for Peanuts?
 - It ought to go down, since people want beer to drink with Peanuts. If the price of beer rises, the demand for
Peanuts will fall.

 Thus an increase in the price of a complement will decrease goes the demand for the good
 And a decrease in the price of a complement will increase the demand for the good

Income, Normal and Inferior Goods

 For most goods there is a positive relationship between income and demand. These are defined as normal goods.
 For inferior goods, there is an inverse relationship between income and demand.
 Are Peanuts a normal good? Are they for you? If they are, upon graduation and a higher salary you would buy
more peanuts.
 The question is empirical - how do people react?

Number of Buyers & Tastes Preferences

 A positive relationship - the greater the number of buyers, the larger the total quantity demanded of the good at
a given price. Demand increases, or the demand curve shifts to the right.
 Likewise, if there are fewer buyers in the market there is less quantity demanded at every price, so demand has
decreased.
 If we find out Peanuts improves our attractiveness to others, our willingness to pay for Peanuts would increase
(an upward shift of the demand curve)
 If we find out Peanuts are unhealthy the demand for the good decreases (a leftward shift of the curve)

Expectations

 If we were to hear a new story about how Peanut prices were going to go up would you stock up?
 If you expect your employer to begin downsizing would you reduce your demand for goods now?
 Lesson 3

Consumer Behavior

Characteristics of a various types of consumers:

o Demographic characteristics
o Psychographic characteristics
o Behavioral characteristics
o Geographic characteristics

Consumer Buying Process:

- is the sequence of steps that a consumer will need to undergo in order to arrive at the final purchasing
decisions. Typical, consumers pursue a usual buying process.

According to Philip Kotler, the typical buying process involves 5 stages;

Problem Recognition
Information Search
Evaluation of Alternatives
Purchase Decision
Purchase
Post-Purchase

Consumer Demand Theory

- analyzes consumer behavior, especially market purchases, based on the satisfaction of wants and needs (that
is, utility) generated from the consumption of a good.

Total Utility - The total satisfaction of wants and needs obtained from the use or consumption of a good and service.

Marginal Utility - The additional utility, or satisfaction of wants and needs.

A basic formulation of consumer demand theory involves an analysis of the total utility and marginal utility derived
from the consumption of a good.
Law of Diminishing Marginal Utility

- marginal utility, or the extra utility obtained from consuming a good, decreases as the quantity consumed
increases.

Utility Maximization

- The process or goal of obtaining the highest level of utility from the consumption of goods or services.

Budget Constraint

- refers to the maximum combined items one can afford with the income generated by the individual.

Consumer Sovereignty

- is the idea that consumers hold the power to influence production decisions, based on what goods and
services they purchase

• In a free market, consumers have greater levels of consumer sovereignty.

• In command economies, goods are produced according to state dictates so there is no consumer sovereignty.

Consumer Surplus

- The differentiation between the maximum product price consumers are willing to spend and the actual price
they pay.
o Budget Constraint - refers to the limit to expenditure imposed by a cash-limited budget. Often used in
conjunction with indifference curves to indicate that would be made by a utility-maximizing individual.
o Consumer Sovereignty - is an economic philosophy that suggest consumer demand drives business in free
enterprise systems- systems in which companies typically have the right to enter an industry and compete fairly.
o Consumer Surplus - is the extra satisfaction received when purchasing a good. It is a term use in economic to
express the difference between how much a consumer paid for a good or service and how much extra they
willing to pay for that good or service.

THE THEORY OF CONSUMPTION

- It is the study of how people decide to spend their money based on their individual preferences and budget
constraint.

Consumer Choice – is the choice of a consumer to buy a product or not. Usually this behavior is to buy products
increase with increasing income. Also depends on consumer satisfaction derives out of the specific product will buy.

TYPE OF CONSUMPTION

o Direct Consumption
o Productive Consumption
o Slow Consumption
o Wasteful Consumption

Situational Influences on Consumer Behavior

Often, costumers react to the following:

1. Temporal Perspective.

 Time Pressure
 Time of the Year
 Time of the Day

2. Purchase Task.

3. Social Surrounding

4. Atmospherics in the Physical Surroundings.

• Point-of-purchase displays
• Color
• Smell
• Music
• Crowds
• Promotional Deals
• Stock-out

PSYCHOLOGICAL INFLUENCES ON CONSUMER BEHAVIOR

B. Perception

o Selective attention. This refers to the process where individuals give high attention to information that is useful
to their direct family members.
o Selective distortion. Consumers are inclined to perceive information in a manner which would be in harmony to
their present ideas and beliefs.
o Selective retention. Costumers retain information which would be helpful to them, and the rest they forget as
time passes.

C. Values , beliefs and Attitudes

ECONOMIC INFLUENCES ON CONSUMER BEHAVIOR