Chapter 2 Supply and Demand

Chapter 2 Supply and Demand - CHAPTER 2 Competitive Product...

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Unformatted text preview: CHAPTER 2 Competitive Product Markets And Firm Decisions Competition, if not prevented, tends to bring about a state of affairs in which: first, everything will be produced which somebody knows how to produce and which he can sell profitably at a price at which buyers will prefer it to the available alternatives: second, everything that is produced is produced by persons who can do so at least as cheaply as anybody else who in fact is not producing it: and third, that everything will be sold at prices lower than, or at least as low as, those at which it could be sold by anybody who in fact does not do so. Friedrich Hayek n the heart of New York City, Fred Lieberman’s small grocery is dwarfed by the tall buildings that surround it. Yet it is remarkable for what it accomplishes. Lieberman’s carries thousands of items, most of which are not produced locally, and some of which come thousands of miles from other parts of this country or abroad. A man of modest means, with little knowledge of production processes, Fred Lieberman has nevertheless been able to stock his store with many if not most of the foods and toiletries his customers need and want. Occasionally Lieberman’s runs out of certain items, but most of the time the stock is ample. Its supply is so dependable that customers tend to take it for granted, forgetting that Lieberman’s is one small strand in an extremely complex economic network. How does Fred Lieberman get the goods he sells, and how does he know which ones to sell and at what price? The simplest answer is that the goods he offers and the prices at which they sell are determined through the market process- the interaction of many buyers and sellers trading what they have (their labor or other resources) for what they want. Lieberman stocks his store by appealing to the private interests of suppliers -- by paying them competitive prices. His customers pay him extra for the convenience of purchasing goods in their neighborhood grocery -- in the process appealing to his private interests. To determine what he should buy, Fred Lieberman considers his suppliers prices. To determine what and how much they should buy, his customers consider the prices he charges. The Nobel Prize-winning economist Friedrich Hayek has suggested that the market process is manageable for people like Fred Lieberman precisely because prices condense into usable form a great deal of information, signaling quickly what people want, what goods cost, and what resources are readily available. Prices guide and coordinate the sellers’ production decisions and consumers’ purchases. How are prices determined? That is an important question for people in business simply because an understanding of how prices are determined can help business people understand I Chapter 2 Competitive Product Markets 2 the forces that will cause prices to change in the future and, therefore, the forces that affect their businesses’ bottom lines. There’s money to be made in being able to understand the dynamics...
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This note was uploaded on 04/10/2011 for the course BUSI 1100 taught by Professor Staff during the Spring '11 term at North Texas.

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Chapter 2 Supply and Demand - CHAPTER 2 Competitive Product...

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