Changes

Let's take an example.  Suppose you own a candy store, and you sell chocolate Hershey candy bars.  What price should you use for those candy bars?  If you sell them for $1 each, many people will buy them.  But if you charge $5 per candy bar, fewer will buy them at that price.  Your quantity of goods sold will be much less.  If, on the other hand, you sell the candy bars for only 10 cents per bar, you'll sell out quickly as people rush to buy the bars at that low price.  It might seem like you'd be happy at selling so many, but you make much less money at 10 cents per bar than at $1 per bar.  So you're worse off if you set the price at only 10 cents per bar, because you receive too little for each bar, and you're worse off if you set the price at $5 per bar, because you sell too few bars.  The best price for you to use for the candy bars is around $1 per bar.

Let's take an example.  Suppose you own a candy store, and you sell chocolate Hershey candy bars.  What price should you use for those candy bars?  If you sell them for $1 each, many people will buy them.  But if you charge $5 per candy bar, fewer will buy them at that price.  Your quantity of goods sold will be much less.  If, on the other hand, you sell the candy bars for only 10 cents per bar, you'll sell out quickly as people rush to buy the bars at that low price.  It might seem like you'd be happy at selling so many, but you make much less money at 10 cents per bar than at $1 per bar.  So you're worse off if you set the price at only 10 cents per bar, because you receive too little for each bar, and you're worse off if you set the price at $5 per bar, because you sell too few bars.  The best price for you to use for the candy bars is around $1 per bar.

The above analysis applies to the sale of a good (a candy bar), but the same analysis applies to the sale of services (such as a car mechanic selling his car repair services).  People sell their time as much as they sell what they own.  In this sense, "time is money" because time can be converted into money by spending that time working.  You could take convert 8 hours of time a day into about $50 by working at McDonalds each day, for example.

The above analysis applies to the sale of a good (a candy bar), but the same analysis applies to the sale of services (such as a car mechanic selling his car repair services).  People sell their time as much as they sell what they own.  In this sense, "'''''time is money'''''" because time can be converted into money by spending that time working.  You could take convert 8 hours of time a day into about $50 by working at McDonalds each day, for example.

We could spend the remainder of this course on pricing goods and services.  Millions of businesses succeed or fail based on how they price their goods or services.  Thousands of people and factors affect the pricing of a good or service, so this question is not as simple as it looks.  Assumptions have to be made in order to draw conclusions.  In some cases, price behavior baffles even the greatest experts in the field.

We could spend the remainder of this course on pricing goods and services.  Millions of businesses succeed or fail based on how they price their goods or services.  Thousands of people and factors affect the pricing of a good or service, so this question is not as simple as it looks.  Assumptions have to be made in order to draw conclusions.  In some cases, price behavior baffles even the greatest experts in the field.

For example, the pricing of stocks freely traded on the stock exchanges is often a mystery.  The value of a company’s stock reflects how much people are will to pay for it.  A company that has one billion shares of stock in the market, valued at $15 per share, has a market value of $15 billion.  Logic dictates that when a stock increases its value, then the company is increasing its overall value.

== Price of Stocks ==

During the internet “dot-com” boom of the late 1990s, stock prices of companies that were losing money seemed to disprove every basic principle of economics.  Sometimes it seemed like the more a dot-com company lost money, the higher its stock would go!

For example, the pricing of stocks freely traded on the stock exchanges is sometimes mysterious.  The value of a company’s stock reflects how much people are willing to pay for it.  A company that has one billion shares of stock in the market, valued at $15 per share, has a market value of $15 billion.  Logic dictates that when a stock increases its value, then the company is increasing its overall value.

But that was an exception that could be understood by questioning typical assumptions.  It was also highly unusual.  More often, stock value in a company that consistently loses money declines to approach zero.  The stock value in a company that increases its profits each year increases to reflect those higher profits.

But stock values, like economics in general, is about '''''the future''''' rather than the past.  Often a company announces a profit for the year, and yet its stock value goes down on the news.  That would be because people would not expect the company to be as profitable in the next year, in the future.  Past profits do not matter to the price of a stock today; profits in the future do.

 

During the internet “dot-com” boom of the late 1990s, stock prices were increasing for companies that were losing money.  That was because people expected the companies to be very profitable in the future.  Sometimes it seemed like the more a dot-com company lost money, the higher its stock would go!  That was based on expectations about the future.  As it turned out, most of these companies went bankrupt, because the internet was profitable for only a few companies like Google.

 

The stock value in a company that consistently loses money declines to approach zero.  The stock value in a company that increases its profits each year increases to reflect those higher profits.

Stock prices on the New York Stock Exchange and NASDAQ (the stock exchange for new and often high-tech companies) are determined entirely by “bid” and “ask” prices of the buyers and sellers.  Someone will “bid” a certain amount to buy a stock, and a seller will “ask” for a certain price.  When the bid and ask amounts equal, then a sales transaction occurs.  Prices can move very quickly and unpredictably when millions of people are involved.

Stock prices on the New York Stock Exchange and NASDAQ (the stock exchange for new and often high-tech companies) are determined entirely by “bid” and “ask” prices of the buyers and sellers.  Someone will “bid” a certain amount to buy a stock, and a seller will “ask” for a certain price.  When the bid and ask amounts equal, then a sales transaction occurs.  Prices can move very quickly and unpredictably when millions of people are involved.