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| | 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. | | 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. |
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| − | The first obvious question about the purchase and sale of goods is this: what determines the price and quantity of goods sold? | + | 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? |
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| − | We could spend the remainder of this course on that simple question. 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. | + | 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. |
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| | + | 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. |
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| | + | 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. |
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| | 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. | | 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. |