Markets What Is A Market  buyers  Sellers  particular good or service  voluntary transactions  information & property rights

Property Rights What Guides Decision-Making  resource ownership  incentive to get the most out resources  scarcity  what to produce?  how to produce it?  who gets it?

Choosing Between Alternatives People do things that make them better off. Do it if…… MB > MC Opportunity Cost Choosing is Refusing!

Producers/Sellers (Supply) People do things that make them better off. For a producer, the benefit is the price received from selling the good. For the producer, the cost is the opportunity cost of the materials and risk involved in producing the good. MB > MC

University of Wisconsin-Eau Claire The World is Full of People

University of Wisconsin-Eau Claire Let’s Graph it

University of Wisconsin-Eau Claire Supply Schedule & Supply Curve

Supply Sellers  Price  price of inputs, technology, weather, # of sellers  All else equal, the quantity supplied of a good varies directly with the price of that good  P ↑ → Qs ↑ P ↓ → Qs ↓  Law of Supply

Law of Supply (Incentives)  sellers could supply other things  price → opportunity cost  high price → produce/sell more  higher price means more incentive to produce this good relative to what else you could do  supply represents marginal cost (willingness to sell)  Skipping class (lecture), Working (leisure time)  Wheat & Oranges in Flansas, Ethanol & Corn  Stuff vs. Clean Air, Housing vs. Green Space

Consumers/Buyers (Demand) People do things that make them better off. For a buyer, the benefit is the satisfaction from consuming the good. For a buyer, the cost is the price paid for the good (what is given up). MB > MC

University of Wisconsin-Eau Claire The World is Full of People

University of Wisconsin-Eau Claire Let’s Graph it

University of Wisconsin-Eau Claire Demand Schedule & Demand Curve

Demand Buyers  price  income, price of other goods, tastes & preferences, # of buyers  All else equal, the quantity demanded of a good varies inversely with the price of that good  P ↑ → Qd ↓ P ↓ → Qd ↑  Law of Demand

Law of Demand (Incentives)  consumers could buy other things  price → opportunity cost  high price → purchase less  higher price means less incentive to consume this good relative to what else you could do  demand represents value (willingness to pay)  Fireballs, Candy-bar, Beer or Soda  Washing Machine  Stuff vs. Clean Air, Housing vs. Green Space

Equilibrium: How do Markets Work?  Buyers and sellers each perform cost/benefit analysis.  Price is a measure of relative scarcity.  Price represents opportunity cost.  Price sends signals/incentives to players. Buyers Sellers

Equilibrium : How do Markets Work? Equilibrium Price  quantity supplied = quantity demanded  market clears: no shortage…..no surplus  no tendency for change

Buyers Sellers Equilibrium

Buyers Sellers

Equilibrium : How do Markets Work? Price & Relative Scarcity  the unit by which we measure relative scarcity  determined by interaction of supply & demand  if a product becomes relatively more scarce, P ↑  if a product becomes relatively less scarce, P ↓

Equilibrium : How do Markets Work? Markets Are Usually A Good Way To Organize economic Activity  goods go to those who value them most  goods are produced by those with lowest cost  voluntary transactions create well-being  efficient allocation of scarce resources  society’s well-being is maximized  not everyone is happy