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{{Economics_Lectures}}

{{Economics_Lectures}}

In the last lecture we introduced the fundamental concepts of economics.  Now we are ready to explore several issues in greater detail.

As a student astutely suggested last class, economics studies the '''''transfer''''' of goods and services.  The first obvious question is this: what determines the '''''price''''' and '''''quantity''''' of goods transferred?  In other words, how much must a buyer pay for the good (the price), and how many units of the good (the quantity) will the seller be able to sell at that price?

 

A focus of economics is on the purchase and sale of goods and services in free enterprise.  By “free enterprise,” I mean business transactions that are "free of" interference by someone other than the buyer and seller, such as government.  Free enterprise has little or no government interference in the setting of prices and selling of the goods or services.  Assume that transactions discussed in this course are in free enterprise unless stated otherwise.

 

The first obvious question about the purchase and sale of goods is this: what determines the '''''price''''' and '''''quantity''''' of goods sold?  In other words, how much must a buyer pay for the good (the price), and how many units of the good will the seller be able to sell at that price?

Let's take an example.  Suppose you own a candy store, and you sell chocolate 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 (perhaps to resell the bars at a higher price and make a profit themselves).  It might seem like you'd be happy at selling so many, but you make much less money overall 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 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 (perhaps to resell the bars at a higher price and make a profit themselves).  It might seem like you'd be happy at selling so many, but you make much less money overall 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 $60 by working at McDonalds each day, for example.

The above analysis applies to the sale of a good (a candy bar), and 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 into about $60 by working at McDonalds, 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 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.

== Price of Stocks ==

== Price of Stocks ==

The price of a company’s stock reflects the price at which people are willing to sell it (the supply price) and the price at which other people are willing to buy it (the demand price).  A "sale" of the stock occurs only when the '''''supply price equals the demand price'''''.  The overall value of a company at any given time is the price per share of its stock, multiplied by the number of shares of stock.  A company that has one billion shares of stock in the market, each valued at $15 per share, has an overall market value of $15 billion.  Logic dictates that when the value of a company's stock increases, then the company itself is increasing in its overall value.

The price of a company’s stock reflects the price at which people are willing to sell it (the supply price) and the price at which other people are willing to buy it (the demand price).  A "sale" of the stock occurs only when the '''''supply price equals the demand price'''''.

 

 

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

Stock prices on the New York Stock Exchange and NASDAQ (the stock exchange for new and often high-tech companies) are determined entirely by the “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.  When the overall trend of most stocks from day-to-day is an increase in their prices, then it is known as a "bull market"; when the overall trend of stocks from day-to-day decreases in price, then it is known as a "bear market."  You can remember that by thinking that bears are scary, and stock markets that crash in price are scary things.

Stock prices on the New York Stock Exchange and NASDAQ (the stock exchange for new and often high-tech companies) are determined entirely by the “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.  When the overall trend of most stocks from day-to-day is an increase in their prices, then it is known as a "bull market"; when the overall trend of stocks from day-to-day decreases in price, then it is known as a "bear market."  You can remember that by thinking of how bears are scary, and stock markets that crash in price are scary things.

As explained above, the price that a stock trades on the exchange is where the “supply” by sellers equals the “demand” by buyers.  When a seller of stock asks too high a price, then there are no buyers and the stock does not trade.  When a buyer of stock offers too little a price, then there are no sellers and the stock does not trade.  The transaction only occurs when SUPPLY EQUALS DEMAND.

As explained above, the price that a stock trades on the exchange is where the “supply” by sellers equals the “demand” by buyers.  When a seller of stock asks too high a price, then there are no buyers and the stock does not trade.  When a buyer of stock offers too little a price, then there are no sellers and the stock does not trade.  The transaction (trade) occurs only when SUPPLY EQUALS DEMAND.

This important principle of "supply and demand" is the most basic concept in all of economics, and we explain it further below.

This important principle of "supply and demand" is the most basic concept in all of economics.  Let's discuss it further.

==Supply and Demand==

==Supply and Demand==

In the 1960s and 1970s, government set the prices for airline tickets, and only the wealthy could afford to travel by plane.  Then, in 1978, Congress "deregulated" the airplane industry, which allowed the free market to set the prices based on supply and demand.  The benefits were tremendous in enabling far more Americans to be able to afford air travel:<ref>http://www.econlib.org/library/Enc/AirlineDeregulation.html (emphasis added, citation omitted).</ref>

In the 1960s and 1970s, government set the prices for airline tickets, and only the wealthy could afford to travel by plane.  Then, in 1978, Congress "deregulated" the airplane industry, which allowed the free market to set the prices based on supply and demand.  The benefits were tremendous in enabling far more Americans to be able to afford air travel:<ref>http://www.econlib.org/library/Enc/AirlineDeregulation.html (emphasis added, citation omitted).</ref>

:Airfares, when adjusted for inflation, have fallen 25 percent since 1991, and ... are 22 percent lower than they would have been had regulation continued. Since passenger deregulation in 1978, airline prices have fallen 44.9 percent in real terms according to the Air Transport Association. ...  [W]hen figures are adjusted for changes in quality and amenities, '''passengers save $19.4 billion dollars per year from airline deregulation. These savings have been passed on to 80 percent of passengers accounting for 85 percent of passenger miles'''.  

:Airfares, when adjusted for inflation, have fallen 25 percent since 1991, and ... are 22 percent lower than they would have been had regulation continued. Since passenger deregulation in 1978, airline prices have fallen 44.9 percent in real terms according to the Air Transport Association. ...  [W]hen figures are adjusted for changes in quality and amenities, '''passengers save $19.4 billion dollars per year from airline deregulation'''.  

As the above example illustrates, the free market lowers costs for the poor.  Wal-Mart is another example of this, as it provides goods at lower and lower prices for everyone.  This is very helpful to the poor.  Someone can have no money, or lose all his money, and yet if he tries then he can live nearly as well as the wealthiest man in the nation -- '''''if''''' the free market exists to drive down prices and provide equal opportunity.  Where the free market does not exist -- as in many countries of the world -- then the poor may go hungry and otherwise suffer, because prices are too high and opportunities are too limited for the poor to improve their life.  Thus one of the best ways to help the poor is to provide them with the free market in order to lower prices and increase opportunities for them.

As the above example illustrates, the free market lowers costs for the poor.  Wal-Mart is another example of this, as it provides goods at lower and lower prices for everyone.  This is very helpful to the poor.  Someone can have no money, or lose all his money, and yet if he tries then he can live nearly as well as the wealthiest man in the nation -- '''''if''''' the free market exists to drive down prices and provide equal opportunity.  Where the free market does not exist -- as in many countries of the world -- then the poor may go hungry and otherwise suffer, because prices are too high and opportunities are too limited for the poor to improve their lives.  Thus one of the best ways to help the poor is to provide them with the free market in order to lower prices and increase opportunities for them.

The free market can have a politically beneficial effect also.  The free market is a powerful force against tyranny.  Government cannot easily control and limit free market supply and demand -- as discussed above, not even all the king's horses and all the king's men, and all the church authorities, could stop the Tyndale Bible.

The free market can have a politically beneficial effect also.  The free market is a powerful force against tyranny.  Government cannot easily control and limit free market supply and demand -- as discussed above, not even all the king's horses and all the king's men, and all the church authorities, could stop the Tyndale Bible.