Download 9a-Buyers-and-Sellers-Determine-Prices

Unit 9
How Markets Work: Relative Prices, Relative Scarcity
Cognitive Objectives:
After you teach this unit, students will:
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Use the concept of competition to explain how buyers and sellers
determine price
Use the laws of supply and demand to explain how price changes affect
buyers and how price changes affect sellers
Identify the factors that influence price elasticities of demand and supply
Identify demand as a schedule of prices and quantities demanded; identity
supply as a schedule of prices and quantities supplied; distinguish both
demand and supply from fixed quantities
Use demand and supply schedules to identify equilibrium prices and
quantities
Distinguish relative from absolute prices
Distinguish scarce from rare or limited
Defend the statement that relative price is the unit by which relative
scarcity is measured
Affective objective:
After you teach this unit, students will:
 Lose the victim attitude when they realize that no one can control prices
unless they can influence supply or demand
Standards:
12.2 Students analyze the elements of America’s
market economy in a global setting:
o Section 1. Understand the relationship of
the concept of incentives to the law of
supply and the relationship of the concept
of incentives and substitutes to the law of
demand.
o Section 4. Explain how prices reflect the
relative scarcity of goods and services
and perform the allocative function in a
market economy.
Principle 6:
Markets work with competition, incentives,
information, and property rights
Some thoughts about teaching markets
The plan for this section of the guide is to demonstrate the efficiency of markets,
which, if achieved would result in positive outcomes. In a sense, we build up a
market “straw man,” in order to help students see the wonders of “allocative
efficiency.” Then, we illustrate the results of market imperfections. The role of
government is then explored and the problems resulting from government actions
are also discussed. Although we wouldn’t, some might call these “market
failures” and “government failures.” The goal is to help the discerning student
decide when market outcomes are appropriate and when government outcomes
are appropriate. Just getting them to ask the question is an important first step.
Markets that work well tend to be efficient, but those efficient outcomes may
result in other outcomes that are undesirable. In general, people think that others
should not go hungry or homeless or uneducated. Once society decides that these
issues should be addressed with non-market solutions, then the economist asks the
question, “How can we address these issues at the same time that we minimize
negative secondary effects?” These negative secondary effects, such as higher
prices for goods protected by tariffs, must be considered in evaluating non-market
solutions.
The key to teaching markets in a balanced and meaningful approach to help
students investigate the contexts in which market allocation is appropriate, when
it is not, and when the use of markets to allocate resources is subject to debate. In
order to do this, students must learn to ask the following questions. 1. What is the
goal of the policy? 2. What are the effects of the policy? 3. Who gains from the
policy? 4. Who loses from the policy? 5. Do we have any way of knowing if the
gains outweigh the losses and whether the losers can be compensated or should be
compensated?
This is a challenging task, but is one of the reasons why teaching economics can
be exciting and stimulating for both you and your students.
Introduction
So far, your students have learned that people can’t have everything they want,
that every decision has a cost, that people will exchange if they expect to gain
more than the value of what they give up, and that the market system is an
efficient method of production and exchange. In this unit, we will explore ways in
which the market system provides incentives for buyers and sellers and how these
participants in a market economy determine how much of each product will be
exchanged at what price.
Unit 9: Buyers and Sellers Determine Prices
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Sellers want as high a price as possible; in fact, if they had their way, the price
would be infinite. Buyers want the lowest price possible; in fact, if they had their
way, prices would be zero. The goals of buyers and sellers are illustrated in the
table below.
Goals of Buyers and Sellers
Buyers
Sellers
Zero price
Complete an
Complete an
exchange
exchange
Infinite price
Class 10: 11:00 – 12:30
Although buyers and sellers have opposite ideas about where the price should be,
they share the goal of completing an exchange. In order to complete a transaction,
they must agree on a price. For the buyer, the price won’t be zero, but it should be
low enough so that he can walk away from the exchange saying that he gained
more than he gave. For the seller, the price won’t be infinite, but she must be able
to walk away from the exchange saying that she gained more than she gave.
Price and the power of competition: What determines price?
How do buyers and sellers who have very different price goals come together to
achieve the common goal of a mutually beneficial exchange? Most likely, all of
your students have exchanged products as either buyers or sellers, and probably
both. They have also witnessed friends or parents buying such items as cars or
homes, goods for which the seller sets an asking price but allows room for
negotiation. They may have noticed that the bargaining process can be very easy
or it can have high transaction costs. Typically, the seller states a price that is
higher than she expects to get, while the buyer states a price that is lower than he
expects to pay. Through a bargaining process which may involve extensive
communication and research (transaction costs), they eventually reach a price that
is mutually satisfactory. Both parties can leave saying, “I gained more than I gave
up.” If that is not the case, they will not reach an agreement, and no exchange will
occur.
A one-on-one price determination, such as buying a car, depends on how badly
the seller wants to get rid of the product and how badly the buyer wants it.
Changes in the number of potential buyers or sellers for a product will result in
price changes. For example, with one seller and five or six prospective buyers, the
buyers are forced to bid against each other and the price will be higher than if
there were a single buyer. The single seller has considerable “market power.” The
more buyers in the market, the greater the competition to buy the product, the
higher the resulting price.
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So, in the above example, the seller is sitting pretty. But what happens if the
number of buyers stays at 1, and more sellers of the same product appear in the
market? Now the first seller must compete with all the other sellers by lowering
her price. This competition among sellers drives the price down. Thus,
competition among sellers drives the price down; the more sellers in a market, the
greater the competition to sell the product, the lower the price.
Competition is a powerful force in the market. Market prices are determined by
the interaction of buyers competing against each other to buy the product, and
sellers competing against each other to sell the product; the greater the
competition among buyers the higher the price, the greater the competition among
sellers the lower the price. This constant tension among buyers and among sellers
is what causes prices to cluster around a particular price called “equilibrium.”
Equilibrium price is the price at which the amount that buyers are willing and
able to buy is just equal to the amount that sellers are willing and able to
supply.
For an explanation of the game that we played in class, go to the Foundation
for Teaching Economics website. All of the materials for this game can be
downloaded from their website.
http://www.fte.org/teacher-resources/lesson-plans/efllessons/in-the-chips-amarket-in-computer-chips/
Unit 9: Buyers and Sellers Determine Prices
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