Lecture: The Market It Sells Into: Economics for Business
Lecture script · about 15–20 minutes spoken · Week 2
Opening
Think about the last time something you wanted sold out. Maybe it was concert tickets, or the good tacos at a food truck before lunch. Now think about the opposite: a store with racks of winter coats it couldn't move, marked down again and again. In both cases you watched a price trying to find its level.
You may know this world from the inside, too. Maybe you've sold produce at a weekend market, worked the register at a nail salon, or watched prices at a family hardware store. Then you've seen buyers and sellers settle on a price, and you've felt the wider economy push on a business.
In Week 1, The Idea and Its Environment, we defined a business, mapped its stakeholders, scanned its outside world with PESTEL, and built the coffee cart's first SWOT. That scan named economic forces and competitors, but it didn't explain how they work. In this lecture we start to.
Here's the plan. First, we'll compare economic systems by asking who owns and who decides. Then we'll read a strawberry schedule to see where a price settles, what a shortage and a surplus are, and what happens when demand shifts. After that we'll sort markets into four structures and place the coffee cart among them. We'll finish with the economy's health signs and who steers each kind of policy. Next, in Week 3, From Idea to Plan: Entrepreneurship, Small Business & the Business Plan, the cart's idea becomes a written plan.
1. Who owns, and who decides
Picture a neighborhood bakery very early in the morning. The ovens are warming, and someone has to decide how many loaves to bake. Too few, and customers leave with nothing. Too many, and bread goes stale. So who makes that call?
It depends on the country the bakery sits in. Every society answers the same questions about its whole economy, and the pattern of answers has a name. An economic system is the way a society answers two questions about its economy: who owns the productive resources, and who decides what gets produced.
Economists usually compare four. A market economy is an economic system in which private individuals and businesses own the productive resources and prices are set by buyers and sellers. There, the bakery's owner decides the loaves by watching what customers buy. A command economy is an economic system in which central planners decide what gets produced, how much of it, and how resources are used. There, a plan hands the bakery its number. Socialism is an economic system in which the government owns or closely directs key industries, so the flour mill might be government-run. And a mixed economy is an economic system that combines private ownership and market prices with a government role in owning, directing, or regulating parts of the economy; nearly every country runs one. There, the owner decides the loaves, but government sets food-safety rules and collects taxes.
Each system has serious defenders and serious critics, and I'm not going to pick a winner for you. Defenders of markets say prices carry information from countless everyday choices and reward new ideas. Critics answer that markets can leave people without basics and ignore harms like pollution. Defenders of planning say it can steer resources fast toward goals like equal access to basics. Critics answer that planners lack the information prices carry, so shortages and waste follow. Defenders of socialism say key industries can be run for public need rather than profit. Critics answer that it weakens the rewards for new ideas and gathers power in government hands.
The classic case for markets is a book by Adam Smith, published in 1776, usually called the Wealth of Nations. You'll hear it named a lot. Famous lines from it are often misquoted, so we name the book and leave the quoting alone.
Pause and try this. A country lets private owners run most shops and farms, but its government also sets safety rules and runs some services. Which system is that?
Use the two questions: who owns, and who decides?
Here's the answer. That's a mixed economy. Private owners and market prices do most of the deciding, and government takes a role in rules and some services, which is the pattern nearly every country follows.
So when someone asks which box a country is in, the better question is how it divides ownership and decisions between private hands and government.
2. Where buyers and sellers meet
Now picture a strawberry stand at a summer farmers' market. The growers have to put a price on the sign. If it's high, fewer shoppers buy. If it's low, more shoppers buy, but growers would rather take their berries somewhere that pays more. Somewhere in between, the two sides meet.
Each side has a name. Demand is the amount of a good that buyers want to purchase at each possible price, read as a whole schedule of prices and amounts. Supply is the amount of a good that sellers want to offer for sale at each possible price, read as a whole schedule of prices and amounts.
Let's read the strawberry schedule we'll use all week. It's an illustration built for this course, not real data. Imagine a table with three columns: the price in dollars a pint, the pints buyers want, and the pints sellers offer. At 2 dollars, buyers want 700 pints and sellers offer 100. At 3 dollars, buyers want 600 and sellers offer 200. At 4 dollars, 500 and 300. At 5 dollars, 400 and 400. At 6 dollars, 300 and 500. And at 7 dollars, buyers want 200 and sellers offer 600.
Hear the two patterns. As the price climbs, buyers want fewer pints. As the price climbs, sellers offer more. At one price, the two amounts match. Equilibrium is the price at which the amount buyers want to purchase matches the amount sellers want to sell.
The schedule is a classroom model, by the way. It assumes one kind of strawberry and nothing else changing while the price moves. Real markets are messier, but the model shows which way prices tend to move.
Pause and try this. On the strawberry schedule, at what price do the two amounts match, and how many pints change hands?
Listen back through the rows for the one where both numbers agree.
Here's the answer. At 5 dollars a pint, buyers want 400 pints and sellers offer 400 pints, so the equilibrium is 5 dollars and 400 pints.
Notice who did not set that price alone: the sellers. A grower who prices above 5 dollars watches berries go unsold, so the price on the sign tends to drift toward where buyers and sellers agree.
3. When the price is wrong
Same stand, wrong price. At 4 dollars, the line is long and the berries run out before lunch. At 6 dollars, the line is short and flats of berries sit in the sun all afternoon.
Each of those days has a name. A shortage is the gap that opens at a price below equilibrium, when buyers want more than sellers offer; it tends to push the price up. A surplus is, in a market, the gap that opens at a price above equilibrium, when sellers offer more than buyers want; it tends to push the price down. It's a different idea from the money a not-for-profit has left over after expenses.
Let's work both. At 4 dollars, buyers want 500 pints and sellers offer 300. Take 300 away from 500 and you get 200. That's a shortage of 200 pints. At 6 dollars, sellers offer 500 pints and buyers want 300. Take 300 away from 500 again and you get 200. That's a surplus of 200 pints.
So what happens next? Shoppers who missed out at 4 dollars would pay more, so growers can raise the price. Growers stuck with extra berries at 6 dollars would rather cut the price than throw fruit away. Either way, the price tends to move back toward 5 dollars.
Here's a way to hold it. Below equilibrium you see a line of people. Above equilibrium you see a pile of berries.
Pause and try this. A shopper arrives at the 4-dollar stand, finds the berries gone, and says the growers must have planned badly. What's a better explanation?
Think about where 4 dollars sits compared with equilibrium.
Here's the answer. The price is below equilibrium. At 4 dollars buyers want 500 pints but sellers offer only 300, so a shortage of 200 pints opens, and it's the price, not bad luck, that created it.
That's the cure for the most common mix-up here. A shortage isn't "the sellers ran out." It's a price sitting below equilibrium.
4. When demand shifts
Now picture the same market on the weekend of a summer festival. Crowds of visitors stroll past. At every price on the sign, more people want strawberries than on a normal day. The berries didn't change; the crowd did.
That's a different kind of change from a price change. A shift of demand is a change in the amount buyers want at every price at once, caused by something other than the good's own price, which moves the market to a new equilibrium.
In our schedule, the festival adds 200 pints of demand at every price. So buyers who wanted 700 pints at 2 dollars now want 900. At 3 dollars, 800. At 4 dollars, 700. At 5 dollars, 600. At 6 dollars, 500. And at 7 dollars, 400. The sellers' column doesn't change at all.
Check the old price first. At 5 dollars, buyers now want 600 pints, but sellers still offer 400. That's a shortage of 200 pints, so the old price can't hold. Now find the new match. At 6 dollars, buyers now want 500 pints and sellers offer 500. So the new equilibrium is 6 dollars and 500 pints. The price rose by 1 dollar a pint, and the amount sold rose by 100 pints.
Think of the buyers' column as a line of people at each price. The festival doesn't move anyone along the line. It adds 200 more people to every line at once.
Pause and try this. A friend says the festival's 6-dollar price is what made shoppers buy more. Is that the right way around?
Ask whether one price changed, or the whole buyers' column.
Here's the answer. It's backwards. The festival raised demand at every price, and the higher price was the result; a higher price on its own would move buyers along the same schedule to a smaller amount.
So keep this line: a price change moves you along the schedule, and a shift moves the whole schedule.
5. How many rivals?
Think about four places that sell something: a wheat farm, a nail salon, a wireless phone carrier, and a city water utility. The wheat farmer can't charge a cent above the going price. The water utility has no rival at all. Those are very different markets.
Economists sort them with one idea. A market structure is a way of sorting markets by how many sellers there are, how alike their products are, and how easily a new seller can enter.
There are four. Perfect competition is a market structure with very many sellers of an identical product, none of whom can set the price. That's the wheat farm. Monopolistic competition is a market structure with many sellers of slightly different products and easy entry for new sellers. That's the nail salon. An oligopoly is a market structure with a handful of large sellers and steep barriers that keep new sellers out. That's the wireless carrier. And a monopoly is a market structure with a single seller protected by high barriers to entry. That's the city water utility.
Now place our coffee cart. It faces many sellers of coffee, including other carts, cafés, and the chain café opening nearby. Each drink is a little different. And a new cart can start with modest equipment and a permit. Many sellers, slightly different products, easy entry: the cart sits in monopolistic competition.
When a market drifts toward a single seller, the law steps in. An antitrust law is a federal law that polices monopoly and limits on competition; the Sherman Act, from 1890, is the first of the three core federal antitrust laws. We name these laws as general education, not as legal advice for any business.
Pause and try this. Someone hears "monopolistic competition" and says the coffee cart must be close to a monopoly. Where does the cart really sit?
Count its rivals, and ask how hard it is to join them.
Here's the answer. The cart sits near the crowded end. It has many rivals and no protection from new ones; the word "monopolistic" only refers to the small pricing room each seller gets from its slightly different drink.
So the cart can charge a little more for a drink people love, but not much, because a rival is a short walk away.
6. The economy's health signs
Picture a family-run hardware store. When the economy grows, people build decks and fix roofs, and the store sells more lumber. When a big local employer cuts jobs, fewer families take on projects. When prices across the economy rise fast, the store's own costs jump and planning gets harder.
Those three worries match the three signs economists watch. The first is growth, and the usual measure is GDP, gross domestic product: the total value of the final goods and services an economy produces in a year, the usual measure of economic growth. In this course we name GDP and never compute it. The second sign is employment, how many people who want work have it. The third is price stability, whether prices across the economy hold steady or climb quickly.
Two kinds of policy try to steady those signs, and different people hold each one. Fiscal policy is government spending and taxation, set in the United States by Congress and the President. Monetary policy is policy run by the Federal Reserve toward the goals Congress assigned it, maximum employment and stable prices. How the Federal Reserve does that work comes later in the course.
Whether any particular tax change, spending plan, or Federal Reserve move is wise is argued terrain. In this lecture I name who holds each lever and stop there.
Pause and try this. A news story says lawmakers agreed to cut a tax. Is that fiscal policy or monetary policy, and who wields it?
Ask whether the story is about the budget or about the Federal Reserve.
Here's the answer. It's fiscal policy, because taxes are part of the government's budget, and Congress and the President set it; the Federal Reserve runs monetary policy, not taxes.
A short way to hold the pair: fiscal is the budget, and monetary is the Fed.
Closing
Let me pull it together in the order we built it. Economic systems differ on who owns resources and who decides what's produced, each has a strong case and strong critics, and nearly every country runs a mixed economy. On the strawberry schedule, the equilibrium is 5 dollars and 400 pints. Below it you get a shortage, above it a surplus, and each pushes the price back toward equilibrium. A festival that adds 200 pints of demand at every price shifts the whole schedule, and the new equilibrium is 6 dollars and 500 pints. Markets run from perfect competition to monopoly, and the coffee cart sits in monopolistic competition. Growth measured by GDP, employment, and price stability are the economy's health signs; Congress and the President set fiscal policy, and the Federal Reserve runs monetary policy.
Next in this module come the slide deck, the Readings and Resources page, the lecture tutorial, the practice set, and the quiz. Then, in Week 3, From Idea to Plan: Entrepreneurship, Small Business & the Business Plan, the coffee cart's idea becomes a business plan.
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