Chapter 3

Chapter 3 - Market Processes and Price Determination...

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Market Processes and Price Determination Chapter 3 The Role of Prices and Profits The Role of Speculation The Role of Competition
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Simple Circular Flow Diagram Businesse s or Firms Households Product/ Good Markets Resourc e Markets Supply/ Ask Demand /Bid Supply / Ask Demand/ Bid Land-rent Labor-wages Capital-interest Entrepreneur- profit
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The Market is a Process- and not a physical thing. A constant series of complex auctions among buyers and sellers- Each seeking to improve his or her own state of affairs- Through specialization and voluntary exchanges- By respecting the life and property of others.
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Pricing process A vast complex of continuous auctions Goods and services are continuously traded from hands that value them less to hands that value them more through a series of bids and offers. Bilateral competition Competition for an identical (homogeneous) good among a number of buyers & sellers. Two-sided “oral” auction—contrast to an “English” (low to high) or “Dutch” (high to
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Class example of bilateral competition: Consider homogeneous good: 55” Toshiba LED HDTV, 1080p, ClearScan 240, slightly used. Choose either: Potential Seller/Owner Then what is your lowest offer or “ask” price (your rock-bottom price), based on the value that the TV has in your life. This is a snapshot of reality, holding personal valuations constant .
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Class example of bilateral competition: Consider an homogeneous good such as an iPhone3g that is slightly used. Now choose one: Owner or Potential Seller Then what is your lowest offer or “ask” price (your rock- bottom price), based on the This is a snapshot of reality, holding personal valuations constant
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Class pricing auction continued Find the market price : that is, the price where the market clears - where Q demanded = Q supplied .
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Chapter 3 - Market Processes and Price Determination...

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