Economics for Leaders Open Markets

Economics for Leaders How much should we do? Work Play Study Sleep

Economics for Leaders As long as the marginal benefit is greater than the marginal cost you should continue the activity MB=MC

Economics for Leaders 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. ERP #3: People respond to incentives in predictable ways.

Economics for Leaders Consumers in Markets desire for a product willingness and ability to pay for it + Demand =

Economics for Leaders How are prices set? By the Market! Interaction of buyers (consumers) and sellers (producers).

Economics for Leaders Necessary conditions for markets Property Rights Clear “Rules of the Game” Freedom to Exchange Information

Economics for Leaders Demand Willingness and ability to purchase goods at various prices.

Economics for Leaders The Law of Demand If P then QD and If P then QD Note: What causes the change in the consumers’ behavior ? (think: price effect)

Economics for Leaders Pictures of Demand Price QD 0 $8 90

Economics for Leaders What influences demand? (Demand Shifters) Taste and preference Substitutes Income Population

Economics for Leaders Assumption: EVERYTHING ELSE REMAINS THE SAME

Economics for Leaders 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?

Economics for Leaders Consumers Are Only ½ the Market Supply

Economics for Leaders Supply Willingness and ability of producers to sell various quantities of goods and services a various prices.

Economics for Leaders The Law of Supply If P then QS and If P then QS Note: What causes the change in the producers’ behavior ? (think: price effect)

Economics for Leaders What influences supply ? Costs of production labor materials facilities tools and machines

Economics for Leaders Pictures of Supply Price Qs 0 $8 75

Economics for Leaders Assumption: EVERYTHING ELSE REMAINS THE SAME

Economics for Leaders Supply shifters costs of production – resource availability changes – technology changes – policies change (taxes, for example) numbers of suppliers

Economics for Leaders 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 ?

Economics for Leaders Student demand for computers Demand Schedule PriceQuantity demanded $ 1,500 1 $ $ $ $ $ $ $ $ 50 30

Economics for Leaders Demand for computers Price Quantity $1,500 $ 800 $ 600 $ 500 $ 300 $ 200 $ 100 $ 80 $ 50 Student Demand

Economics for Leaders Teacher demand for computers Demand schedule PriceQuantity demanded $ 5,000 1 $ $ $ $ $ $ $ $ $ 50

Economics for Leaders Demand for computers Price Quantity $5,000 $1,500 $ 800 $ 600 $ 500 $ 300 $ 200 $ 100 $ 80 $ 50 Student Demand Teacher Demand

Economics for Leaders Student supply of labor Supply schedule PriceQuantity supplied (average/per person) $ $

Economics for Leaders Supply of Labor Price Quantity $35 $ Student supply

Economics for Leaders Supply of Labor Price Quantity $35 $ Student supply Teacher supply

Economics for Leaders Demand for computers Price Quantity $2,500 $1,800 $1,500 $1,100 $ 900 $ 700 $ 500 $ 150 $ 20 Supply

Economics for Leaders 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

Economics for Leaders Price Quantity DemandSupply Market Clearing or Equilibrium Price P 1 P 2

Economics for Leaders 1.Markets are dynamic. 2.Market prices aren’t set; they happen!

Economics for Leaders 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.

Economics for Leaders Institutions necessary for well- functioning markets: Property rights Rule of law

Economics for Leaders Price Quantity DemandSupply Market Clearing or Equilibrium Price P 1 Q 1 P 2 Q S Q D Surplus

Economics for Leaders Price Quantity DemandSupply Market Clearing or Equilibrium Price P 1 Q 1 P 2 Q S Q D Shortage

Economics for Leaders Consumer surplus X PXPX CS CS = the extra value individuals receive from consuming a good over what they pay for it.

Economics for Leaders Producer surplus Q 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

Economics for Leaders