ECONOMICS U$A
Episode 2

MARKETS AND PRICES
PURPOSE:
To show how a well-functioning free market pricing system determines how producers manufacture goods, what goods will be manufactured, and for whom the goods will be produced.

OBJECTIVES:
1. The meeting of buyers and sellers in a market can be represented by supply and demand curves. The curves show what sellers (buyers) are willing to sell (buy) at various prices. In a perfectly operating market the intersection of the supply and demand curves will be the point at which buyers and sellers agree on the price and quantity.

2. Goods are produced by using resources such as labor, machinery, and materials. The prices of these resources are set by supply and demand in the free market, and the producer is forced by competitive pressures to choose the method of production, which is least costly, i.e. the method which conserves high priced materials.

3. Consumers "reveal" how much they want a good by the way they spend their money. If a great deal of money is being spent on a certain good, producers will try to make more of that good. If consumers change the way they spend their money, producers will respond.

4. There is a difference between "need" and "effective demand." The market system only responds to those who have money to spend. The poor have the need for many goods that the free market system will not provide for them, because the market system only responds to needs that people spend money on..

KEY ECONOMIC CONCEPTS:
supply and demand curves methods of production
shift in demand, market failure, equilibrium price and quantity.

Contemporary Issues
Markets and Prices

From time to time, we hear that (alternately) there are too many lawyers and too few doctors. What could create such an excess supply or excess demand? What kind of role might the American Bar Association and the American Medical Association be playing in such market disequilibria (mismatch between supply and demand)? What would happen if the markets for doctors and lawyers were perfectly competitive?

For a complete transcript of this video program download TVpdf#2

WWII: Homes Sweet Homes
 WWII was over. Millions of GI’s came home, fell in love, got married and started families. But there was one thing they all needed. A home and a roof over their heads. Depression and war had put homebuilding on hold for almost 20 years. What housing there was, was not cheap. Most were beyond the means of young vets with new jobs and new families. It was demand in search of supply.

Homebuilder William Levitt, the Henry Ford of the housing market, recognized the housing shortage and put money into building low cost housing. He laid out 6,000 lots on low cost, Long Island potato fields. He used assembly line methods to mass produce houses which would look very much the same. However, in a nation dedicated to individualism, would mass production houses have mass appeal?

The answer was a resounding yes. People were coming out from all over the country to get a home. Regardless of what the place looked like, it filled their needs for housing. Levittown type developments sprang up in every major city and it paid off financially but also had a great psychological payoff by giving families a stake in their community and their country.

Comment and Anyalsis by Richard Gill
Richard Gill explains the shifting supply and demand curve using the housing shortage following WWII. There was a large potential demand for inexpensive housing in the post-war period and William J. Levitt supplied that demand. At high prices very few houses are demanded. At a low price the effective demand for houses is high.

American Mini -Steel
For 75 years, U.S. steel producers had the steel market to themselves. They ran the big- so-called integrated mills. They set their own prices and own rules. In the 60’s and 70’s, as labor and energy costs rose, steel prices rose even more until foreign steel began to underbid American steel on American buildings and bridges. In the U.S. plants closed and workers were laid off. In seeking to see what could be done to rebuild the faltering steel industry,

Kenneth Iverson, President of NUCOR, wondered if low cost steel couldn’t be made in America. He decided it could by using Europe’s latest technology effectively lowering production costs. But what about labor costs? Lower prices of foreign steel makers were based on lower wages. However according to Iverson, "it’s not what you pay an employee that’s important. It’s what he produces." He was able to get his mini mill workers to produce at least 2 times that of the average integrated steel producer worker. This caused NACOR and other mini mills to become very efficient and profitable.

The lesson for the integrated steel mills is that they can compete if they seek new ways of doing business.

Comment and Anyalsis by Richard Gill
Markets can produce the unexpected. They can stimulate innovations, new products or new ways of producing products. The introduction of the mini mills in the steel industry was such an unexpected innovation. Richard Gill uses the supply and demand curve to explain.

Take Me Out to the Ballgame
The NY Yankees had fallen into hard times. In order to bring winning baseball back to Yankee Stadium, owner George Steinbrenner, of the New York Yankees, paid an enormous sum of money to buy the talents of Reggie Jackson. In 1976, that meant Reggie Jackson. Jackson was the biggest prize in that first free agent market. With an employee such as Reggie offering a rare skill and a following of paying customers Steinbrenner felt that the Yankees could afford the high salary that Reggie demanded.

So when hiring an employee means higher profits, most employers can see the higher salary as a good investment. In terms of the labor market, it helps to explain why there is a vast difference between the incomes of different people, even when they're on the same team.

Comment and Anyalsis by Richard Gill
Once again Richard Gill uses the supply and demand curve applied to the prices of our services and income. If public demand is high for certain kinds of rare skilled labor (rock stars, ballplayers, and other celebrities), then customers and employers will be willing to pay much more for their services.

An underlying lesson is that the market doesn’t always produce a result we find personally agreeable, hence a talented athlete can earn more than the President of the United States.