For the time being, I'm going to talk about markets in layman's terms, no “econo-speak”
allowed, and the same goes for you, too.
Textbook terms like “demand,” “supply,” and “equilibrium” are off-limits until
further notice.
OK, in plain English: What two things we have to have in order to have a market?
Well, you’re going to have to have buyers, and sellers.
Why does a buyer enter into a market?
First and foremost, the buyer's number one, primary objective is to acquire goods and
services.
Secondarily, the buyer wants to get the goods and services at the best possible price; “best,”
to the buyer, meaning lowest.
What does this look like?
Well, there’s going to be a relationship between the product and the price, I can see
that.
OK, suppose I’m a typical buyer, who would like to enter the market for, let's say, leather
jackets.
What determines how much I'm willing to pay for a jacket?
My tastes, climate in my area, my income, etcetera -- there's some maximum price I’m
willing to pay, let's say a price P1.
Is there any other price I’d be willing to pay?
Well sure; I’d love to pay less, so I'll take any price lower than my maximum price.
Do you suppose there are any other buyers out there who want a new jacket?
Well, yeah, there are probably thousands of buyers in the market, each with his or her
own willingness to pay, but hoping for a lower price.
What about the sellers’ side of the market?
Why does the seller enter the market?
First and foremost, the seller's number one, primary objective is to offload their goods
and services, so that they can make some money.
Secondarily, the seller wants to sell those goods and services at the best possible price;
“best,” to the seller, meaning the highest.
What does this look like?
Again, you can already see that there is a relationship between the product and the price.
Well, now, let's pretend you're a seller.
You decide to sell leather jackets in Scottsdale, Arizona.
You find that the rents are high, the wages are high, and just to cover your costs to
stay in business, you have to charge a fairly high price.
Is there any other price you'd be willing to accept?
Well, of COURSE, you'd be happy to take more money!
What if another seller enters the market for leather jackets with a storefront in say,
Apache Junction, Arizona.
Rents are lower, wages are lower, and your new competitor can get his jackets cheap,
out of the back of his cousin Vinny’s truck.
He can sell at a much lower price and still cover his costs.
Is there any other price he'd be willing to accept?
Well, sure, just like you, he’s happy to take a higher price.
Do you suppose that there any other sellers in the market?
All right, so we know it's happening on the buyers’ side, and on the sellers’ side,
but we also know that it’s not a market unless you have both buyers and sellers together.
Because each side has a relationship between the price and the product, we can overlap
them into one diagram.
So -- why do we want to look at markets in the first place?
Because in our economic system, a market economy, it’s the market that determines price, and
price serves as the rationing mechanism to determine who gets the scarce product or service
and, who does not.
Now that we know what competitive market --lots of buyers competing to acquire the product,
lots of sellers competing to make the sale -- looks like; well, what is “the price”?
As you can see, competitive markets are messy.
From this depiction, can we tell anything about the price?
What is the highest price we'd ever see in this market?
The maximum price in the market is going to be determined by the upper boundary buyer.
What is the most that any buyer is ever willing to pay?
If the price ever goes higher than this, then there would be no buyers, and therefore no
market.
What’s the lowest price we'd ever see?
The minimum is determined by the lowest-cost seller; no sellers can survive at a lower
price than that.
So, as of this moment, we don't know “the” price, but we have a limited range of possible
prices, and a hunch that “the” price is probably somewhere in the middle, where most
of the action is going on.
NEXT TIME: a market experiment to find the price
TRANSCRIPT00(MICRO) EPISODE: MARKET PROLOGUE