Download The market

The market:
A market is a situation or a place where goods or services are exchanged
We have become more specialised and as a result have become more
interdependent with other people. By specialling we need to exchange goods and
services and there must be some formal way of making these exchanges.
Diversity of markets
-size and extent
Markets can be small, relatively large and huge
-level of competition
Markets can be very competitive where buyers can choose from a range of
sellers. Some markets are dominated by large groups of sellers called cartels.
The least competition occurs with monopolies, one sell = no competition.
-function
The wholesale market refers o transactions between wholesalers and retailers
The retail market refers to transactions between retailers and consumers
Types of markets:
The goods and services market
The resource market
The money market
The foreign exchange market
Goods and services market:
Firms provide goods and services in return for consumption spending. Exchange
of goods/services for household’s income takes place in the goods and services
market.
Households own the resources used in production. In all cases, households
provide either labour or other resources and in return receive an income from
firms. The level of these incomes will be determined by the interaction of demand
and supply in the resource market. A market between the firms will be prepared
to pay for resources and what owners of resources are prepared to sell them for.
The returns or incomes to the owners of resources are given specific terms:
Human resources are paid wages or profit
Natural resources are paid rent
Man made resources (capital) are paid interest
The money market:
This is concerning the supply and demand for money and interest. Money flows
from saves to financial institutions and then onto borrowers.
The foreign exchange market:
NZ money and overseas currencies are bought and sold
Money is a commodity
Buy in overseas currencies to pay for imported goods.
Methods of dealing in a market:
Dealership or shop
Retail shop
Fleamarket
Auction
Fair
Stock exchange
Roadside stall
Garage sale
Telemarketing
Internet shopping site
Private sale
Tender
Barter – uncommon in developing countries
Need to have a double coincidence of wants
Person trading has to find someone who is trading what they want and hope that
they will trade with them and want what they are trading. Really hard to exchange
goods. Must both want each others goods and agree on the amount.
Disadvantages of barter:
Tim consuming
Inconvenient
Hard to trade if no one wants your good
Four uses of money
Medium of exchange
Means of deferred payment
Measure of value
Store of value
Features of money:
Scarce
Portable
Recognisable
Acceptable
Durable
Divisible
Koha: A Maori word meaning a gift from the heart. It is money to thank the local
iwi or tribe for their hospitality. This is not a set amount. The giver decides the
amount.
Utu: A gift in return for a favour, it is unexpected.
Contracts
Essential requirements:
Intention of legal agreement
Object of contract must be legal
An offer and acceptance are needed
Parties to a contract must have contractual capacity
The contract must be in its proper form
Something of value must be exchanged
Where do consumers go?
Consumers can go to the citizen’s advice bureau, commerce commission and the
disputes tribunal if the problem is not fixed
Disputes tribunal:
Fast and efficient services
Can only take claims up to $13000
Cheaper than using lawyers and a court system
Disputes are resolved by:
Both parties settling an agreement
Referee making a decision if parties cannot
Both the seller and the consumer have rights and responsibilities
Seller:
Legal right to sell the product
To sell/supply a safe good or service
Not to mislead customers
To provide redress if a good or service does not meet the consumers guarantee
act.
Seller’s rights:
To be paid in full by the due date
If not, to repossess/sue for damages
To correct an error in a price tag
Consumer:
To pay debts on time
To be assertive and get a fair deal
To pay taxes
Caveat Emptor
Let the buyer beware
You must ensure that the goods are fit for the purpose that they are intended for.
Equilibrium – The balance between the forces of demand and supply
Market Equilibrium – Where the quantity supplied by all producers equals the
quantity demanded by all consumers and the market is cleared.
Surplus
Any price above the equilibrium price will result in excess supply (surplus).
Suppliers will have to drop their prices down to equilibrium.
Reasons for surplus:
Trying to charge a price higher than equilibrium
Holding onto a previous price despite increase in supply
Holding onto a previous price despite increase in demand
Shortage:
Any price below the equilibrium price will result in excess demand (shortage).
Suppliers will have to increase their prices up to equilibrium.
Reasons for shortage:
Charging a price lower than equilibrium
Holding onto a previous price despite an increase in demand
Holding onto a previous price despite a decrease in supply
World prices
Countries with small economies are not able to dictate or influence world prices
for commodities. Therefore they must accept the prices that the world market has
set and they are therefore price takers.
Inflation
When we import inflation is placed on the good due to the other countries
economy or world circumstance.
To maximise profits New Zealand will aim to sell their output wherever the price
is highest. If the world price higher then producers will export their output instead
of selling in the domestic market.
If overseas prices increase, producers will increase exports and less will be
available for the domestic market.
If overseas prices decrease, producers will increase imports and more will be
available for the domestic market.
World prices > Domestic prices
The product will be exported
Domestic prices will increase
World prices < Domestic prices
The product will be imported
Domestic prices will decrease
When the government has fixed the price of a good or service by law; market
forces can not return the price back to equilibrium. A surplus or shortage will
occur.
Maximum prices lead to shortages which lead to:
1) First in, First served
2) Illegal or black markets as a way of getting around the shortage.
Consumers keen to buy will buy at a higher illegal.
3) Government estimates the quantity of a good available – issues ration
cards
4) Sellers supply only to regular customers so others miss out
When shortages occur, buyers and sellers will try to find a way of allocating
scarce resources.
Taxation
Direct taxes
Direct taxes are paid straight to the government.
Both households and companies pay taxes out of income. The level of direct
taxation affects the income that households have to spend on consumer goods
and services, and the amount companies have to buy capitol goods.
Indirect taxes
An indirect tax is a tax collected by a third party then passed onto the
government. For the producer, indirect tax represents another cost of production.
Subsidies
A subsidy is a payment by government in order to reduce the costs of production.
A subsidy will reduce the price and encourages people to consume the good.
Competition for consumer dollars:
Product differentiation
Encourages consumers to buy a good or service by making it appear different
and superior to a competitor’s product.
Product Variation
Product variation is where producers use a series of strategies to get consumers
to buy a product by giving it real variations making it different and superior to
competition.
-Product modification
Here producers bring in real differences incorporating new features, new
designs. Many of the modifications subsequently become standard fittings.
-Vertical product variation
To make their product appeal to a wider range of income levels, producers may
introduce a number of different models of the same product. The majority of
people will buy a standard model. Those with more disposable income may buy
the standard model with extras. Those with more disposable income may
purchase the luxury model, while those with a low disposable income will buy the
economy model.
Advantages of non-price competition
Consumers:
Better service
Wider choice
Better quality
Better packaging
Producers:
Increased market share
Doesn’t have to cut profit margins
Increased sales and profits
Reduces chance of a price war
Disadvantages of non-price competition
Consumers:
Higher prices as businesses pass on the extra costs
Confusion resulting from conflict of advertising
A false sense of choice resulting from product differentiation
Vertical product variation - Fewer of each product made, leads to increased
average costs
Producers:
Increased costs
Reduced profits
Price competition
Firms reduce their prices to increase market share
The amount of profit per item is reduced
As price decreases, quantity demanded increases – produces sell more.
Dangers of price competition
Price wars
-Profit margins reduced
Less economically viable
Firms may liquidate
Remaining firms gain greater market share
Better control of price leads to increase in price
Consumer has fewer choices
Advantages of price competition
Consumer:
Cheaper price
Able to buy more
Producer:
Lowers cost of production
Disadvantages of price competition
Producers:
Price war – firm liquidates (extreme circumstances)
Loss of profits
No change in their market share
Consumers:
Firms may go under leaving less choice. (prices rise)
In time results in less competition and higher prices for consumers if some
businesses are forced out of the industry.
Price competition strategies
What are they?
Discounts
Interest free terms
Cheapest deals
Sales
Loss leaders
Short term the consumer is the winner
Buy one, get one free
Minimum trade-ins
Alternatives to market allocation
Non-market process
Exchange of a good or service may occur but money is not used
Self-sufficiency – No need to exchange any goods because you grow, make and
harvest everything you need.
Koha is a form of non-market activity
Utu is a for of non-market activity