How is the market price of trash bags created? Are all other home goods taken into account?
In: Economics
The market price of trash bags is created in the same way as the market price of anything. The process is really simple, and can be illustrated by a short example:
Imagine you have a trash bag and a bunch of people want to buy it from you. Who do you sell it to?
You sell it to whoever will pay you the most. You don’t do research to see how much they are paying for other stuff, you don’t consider what they are using it for, you don’t look at a thousand other things tangentially related to trash bags. You are exchanging a trash bag for money, you want as much money as you can for your trash bag.
People with money who want a trash bag in turn are trying to get a bag while spending as little money as they can. In combination these two competing forces eventually equalize at the market price of trash bags.
Assuming that the market for trash bags is perfectly competitive (which it isn’t but we’ll assume that for this model), the price is at first determined by the first firm to enter the market. Since the firm has significant market power, it can charge prices such that the cost of producing the marginal unit is lower than the price that people are willing to pay for it (the profit maximizing quantity is determined by the point where marginal revenue is equal to marginal cost) . However, because producing trash bags does not have a significant barrier to entry, other firms will jump in on the opportunity and compete with each other, knowing that the consumer doesn’t really care who sells their trash bags and will pick the one that sells for the lowest price. This will happen until prices are driven to the point where the average total cost of producing a trash bag is equal to the marginal revenue from selling a trash bag, and firms must take the price as given and are no longer able to make economic profits. This is the market price that firms will charge.
Latest Answers