Transcript Lesson 3 Markets

Economics for Leaders
Open Markets
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How much should we do?
Work
Play
Study
Sleep
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As long as the marginal
benefit is greater than the
marginal cost you should
continue the activity
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MB=MC
ERP #3:
People respond to incentives in predictable ways.
Price IS an extremely powerful
incentive
Analyze: When the money price changes,
the opportunity cost of using a good or
resource changes. The changed
opportunity cost provides an incentive for
people – consumers and producers – to
change their behavior.
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Consumers in Markets
Demand =
desire for a
product
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+
willingness
and ability to
pay for it
How are prices set?
By the Market!
Interaction of buyers (consumers)
and sellers (producers).
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Necessary conditions for
markets
Property Rights
Clear “Rules of the Game”
Freedom to Exchange
Information
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Demand
Willingness and ability to purchase goods
at various prices.
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The Law of Demand
If P
If P
then QD
and
then QD
Note: What causes the change in the
consumers’ behavior ?
(think: price effect)
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Pictures of Demand
$8
Price
0
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90
QD
What influences demand?
(Demand Shifters)
Taste and preference
Substitutes
Income
Population
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Assumption:
EVERYTHING
ELSE
REMAINS
THE
SAME
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Demand shifters:
examples
What will happen to the demand for
hamburger if the price of hotdogs
increases?
What will happen to the demand for
Snickers if it is discovered that chocolate
makes you beautiful?
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Consumers Are Only ½ the
Market
Supply
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Supply
Willingness and ability of producers
to sell various quantities of goods
and services a various prices.
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The Law of Supply
If P
If P
then QS
and
then QS
Note: What causes the change in the
producers’ behavior ?
(think: price effect)
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What influences supply ?
Costs of production
labor
materials
facilities
tools and
machines
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Pictures of Supply
Price
$8
0
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75
Qs
Assumption:
EVERYTHING
ELSE
REMAINS
THE
SAME
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Supply shifters
costs of production
– resource availability changes
– technology changes
– policies change (taxes, for example)
numbers of suppliers
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Supply shifters: Examples
What will happen to the supply of DVDs
if recording technology becomes more
efficient? Why?
What will happen to the supply of new
houses after a summer of terrible fires
destroys many forest areas? Why?
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Student demand for computers
Demand Schedule
Price
Quantity demanded
$ 1,500
1
$ 800
4
$ 600
6
$
500
14
$ 300
18
$ 200
21
$ 100
24
$
80
26
$
50
30
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Demand for computers
Price
$1,500
Student
Demand
$ 800
$ 600
$ 500
$ 300
$ 200
$ 100
$
80
$
50
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6
14
18
21
24
26 29
Quantity
Teacher demand for computers
Demand schedule
Price
Quantity demanded
$ 5,000
1
$ 800
5
$ 700
6
$ 600
8
$ 500
11
$ 400
14
$ 300
21
$ 200
24
$ 100
30
$
50
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Demand for computers
Price
$5,000
$1,500
Student
Demand
$ 800
$ 600
$ 500
$ 300
$ 200
$ 100
$
80
$
50
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4
Teacher
Demand
6
14
18
21
24
26 29
Quantity
Student supply of labor
Supply schedule
Price
Quantity supplied
$ 10
$ 35
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(average/per person)
129.3
184.9
Supply of Labor
Price
Student supply
$35
$10
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50
100
175
200
Quantity
Supply of Labor
Price
$35
Teacher supply
Student supply
$10
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50
100
175
200
Quantity
Demand for computers
Price
Supply
$2,500
$1,800
$1,500
$1,100
$ 900
$ 700
$ 500
$ 150
$
20
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3
6
11
15
20
23
29 31
Quantity
Equilibrium Price
The price at which the amount (quantity)
people are willing and able to buy = the
amount (quantity) producers are willing
and able to sell.
QD = QS
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Price
Market Clearing or Equilibrium Price
Demand
Supply
P 1
P 2
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Quantity
1. Markets
are
dynamic.
2. Market
prices
aren’t
set; they
happen!
http://www.youtube.com/watch?v=Ng3XHPdexNM
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ERP-4:
Institutions are the “rules of
the game” that influence
choices.
Laws, customs, moral principles,
superstitions, and cultural values
influence people’s choices. These basic
institutions controlling behavior set out
and establish the incentive structure and
the basic design of the economic system.
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Institutions necessary for wellfunctioning markets:
Property rights
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Rule of law
Price
Market Clearing or Equilibrium Price
Demand
Supply
P 2
Surplus
P 1
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Q D
Q 1
Q S
Quantity
Price
Market Clearing or Equilibrium Price
Demand
Supply
P 1
Shortage
P 2
Q S
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Q 1
Q D
Quantity
Consumer surplus
PX
CS = the extra value
individuals receive from
consuming a good over
what they pay for it.
CS
X
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Producer surplus
P
S
Producer surplus is the
extra value producers
get for a good in excess
of the opportunity costs
they incur by producing
it.
PS
Q
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