1. Buyers and Sellers
Determine Prices
nota bene: ( Buyers = DEMAND
& Sellers = SUPPLY )
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2. Goals of Buyers and Sellers
BUYERS SELLERS
(wants an) Infinite Price
Make a transaction Make a transaction
(wants a) Zero price
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3. The Process of Price
Determination
Getting to:
DEMAND = SUPPLY
with Buyers and Sellers
Negotiating within a “Marketplace”
to agree on a transaction price.
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4. COMPETITION IS THE
ULTIMATE REGULATOR
[ “.C.I.I.P.” ]
Competition has the ability to
constrain both the buyers and the
sellers in any given transaction.
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5. Competition is the Regulator
“If the SELLER charges too much for his
wares or if he refuses to pay as much as any
other PRODUCER to his workers he will
find himself without buyers in the one case
and without workers in the other.”
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6. Buyers want the lowest possible price
for the “asset” they want to buy but....
Price
DEMAND CURVE
For
Sale
Quantity
6

7. they will have to compete against all the
other like motivated buyers.
Price
DEMAND
For
Quantity
Sale
7

8. Sellers will always want to charge the
highest price possible but ......
Price
For
SUPPLY
CURVE Sale
Quantity
8

9. they have to compete against all
Price other sellers.
SUPPLY
Quantity
For
Sale
9

10. Competition will determine
Equilibrium Price
Price
SUPPL
Y
$*
DEMAND
For
Q* Quantity Sale
Q. What does the SUPPLY curve
look like in this transaction?
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11. How is the price determined?
• the Buyers will compete against each other and
drive the price up
• the Sellers will compete against each other and
drive the price down
• the Equilibrium Price will be determined by
the impersonal forces of SUPPLY and
DEMAND in the Marketplace
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12. About the BUYERS
just a bunch of “normal” people?
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13. and Influencing the SELLERS
13

14. Reservation Prices
• Sellers
– Supply price
– The lowest price a seller is willing and able to
accept for a particular quantity of a particular
product
• Buyers
– Demand price
– The highest price a buyer is willing and able to pay
for a particular quantity of a particular product
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15. At the equilibrium price
• Buyers who are able and willing to pay
“the price” get the goods and services they
desire (or can) [what hidden message]
• Sellers who are able to produce at “the
price” sell all they wish or can [what
hidden message]
• There are neither surpluses nor shortages
• Not all prospective buyers or sellers are or
will be satisfied
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16. Relative Prices
Income = $30,000
$40
$10
$20
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17. Relative Prices Have Not Changed
Income = $30,000
Income = $60,000
$40
$80
$10
$20
$20
$40 17

18. SUPPLY (Curve) – a relationship
Price Quantity
Supplied
$10 5
$9 4
$8 3
$7 2
$6 1
$5 0
$4 0
$3 0
$2 0
$1 0
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19. The Law of Supply
• Once all other factors have been
considered the quantity to be supplied of
a product varies directly with the price of
the product.
• If the price rises the quantity supplied
will rise; if the price falls the quantity
supplied will fall.
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20. DEMAND (Curve) – a relationship
Price Quantity
Demanded
$10 0
$9 0
$8 1
$7 2
$6 3
$5 4
$4 5
$3 6
$2 7
$1 8
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21. The Law of Demand
• Once all other factors have been considered
the quantity to be demanded of a product
varies inversely with the price of the
product.
• If the price rises the quantity demanded
will fall; if the price falls the quantity
demanded will rise.
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22. Price Elasticity of Demand
• Measure of the strength of buyers’
reactions to price changes
• If buyers don’t react very strongly =
inelastic
• If buyers react strongly = elastic
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23. Determinants of
Price Elasticity of Demand
• availability of substitutes
• percentage of income
• time (why would this be here?)
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24. Price Elasticity of Supply
• Indicator of the strength of seller’s
response to price change
• Determinants
– time
– use of easily transferable resources
– divisibility of inputs.
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25. Equilibrium Price and
the Quantity Exchanged
Price Quantity Supplied Quantity Demanded
$10 5 0
$9 4 0
$8 3 1
$7 2 2
$6 1 3
$5 0 4
$4 0 5
$3 0 6
$2 0 7
$1 0 8
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26. @ The Equilibrium Price
• Quantity supplied equals quantity demanded
• No shortages or surpluses
• The market clears
• Scarcity is not eliminated
• The measure of relative scarcity
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27. Relative Price: unit by which we
measure relative scarcity
(Units on the Scarcometer)
$
$
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28. Order these products in terms of
relative scarcity (most to least)
yacht
candy bar
dinner for one at MacDonalds
a nice dinner for two in LA
laptop computer
Toyota mini truck
ticket to a professional baseball game
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29. Main Points
• The Law of Demand states a higher
price will cause a decrease in the
quantity demanded and a lower price
will cause an increase in the quantity
demanded.
• A demand schedule is a relationship
between prices and the quantities
demanded.
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30. Main Points
• The Law of Supply states a higher
price will cause an increase in the
quantity supplied and a lower price
will cause a decrease in the quantity
supplied.
• A supply schedule is a relationship
between prices and the quantities
supplied.
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31. Main Points
• the Price Elasticity of Demand
measures the strength of the buyers’
response to price changes.
• The determinants of Price Elasticity
of Demand are availability of
substitutes, percentage of income,
and time.
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32. Main Points
• the Price Elasticity of Supply measures
of the strength of seller’s response to a
price change
• The determinants of Price Elasticity of
Supply are time, the deployment of
easily transferable resources, and the
divisibility of inputs.
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33. Main Points
• Buyers and sellers (the demanders and the suppliers)
determine the equilibrium price and the quantity
exchanged at the equilibrium price.
• At the equilibrium price the number of items sellers
are willing and able to offer for sale equals the number
of items buyers are willing and able to purchase.
• Relative scarcity is the relationship between supply
and demand.
• Price is the measure of relative scarcity.
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