economics for leaders open markets. economics for leaders how much should we do? work play study...

Economics for Leaders

Economics for Leaders

Open Markets

Economics for Leaders

How much should we do?

WorkPlayStudySleep

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 RightsClear “Rules of the Game”Freedom to ExchangeInformation

Economics for Leaders

Demand

Willingness and ability to purchase goods at various prices.

Economics for Leaders

The Law of Demand

If P then QD andIf 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 preferenceSubstitutesIncome Population

Economics for Leaders

Assumption:

EVERYTHINGEVERYTHINGELSE

REMAINSTHE

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

SupplySupply

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 andIf P then QS

Note: What causes the change in the producers’ behavior ?

(think: price effect)

Economics for Leaders

What influences supply ?

Costs of productionlabor

materialsfacilitiestools and

machines

Economics for Leaders

Pictures of Supply

Price

Qs

0

$8

75

Economics for Leaders

Assumption:

EVERYTHINEVERYTHINGG

ELSEREMAINS

THESAME

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 SchedulePrice Quantity demanded$ 1,500 1$ 800 4$ 600 6$ 500 14$ 300 18$ 200 21 $ 100 24$ 80 26$ 50 30

Economics for Leaders

Demand for computers

Price

Quantity1 4 6 14 18 21 24 26 29

$1,500

$ 800

$ 600

$ 500

$ 300

$ 200

$ 100

$ 80

$ 50

Student Demand

Economics for Leaders

Teacher demand for computers

Demand schedulePrice Quantity demanded$ 5,000 1$ 800 5$ 700 6$ 600 8$ 500 11$ 400 14$ 300 21$ 200 24$ 100 30$ 50

Economics for Leaders

Demand for computers

Price

Quantity1 4 6 14 18 21 24 26 29

$5,000

$1,500

$ 800

$ 600

$ 500

$ 300

$ 200

$ 100

$ 80

$ 50

Student Demand

Teacher Demand

Economics for Leaders

Student supply of labor

Supply schedulePrice Quantity supplied

(average/per person)

$ 10 129.3$ 35 184.9

Economics for Leaders

Supply of Labor

Price

Quantity

$35

$10

50 100 175 200

Student supply

Economics for Leaders

Supply of Labor

Price

Quantity

$35

$10

50 100 175 200

Student supplyTeacher supply

Economics for Leaders

Demand for computers

Price

Quantity1 3 6 11 15 20 23 29 31

$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

Demand Supply

Market Clearing or Equilibrium Price

P 1

P 2

Economics for Leaders

1.Markets are dynamic.

2.Market prices aren’t set; they happen!

http://www.youtube.com/watch?v=Ng3XHPdexNM

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

Demand Supply

Market Clearing or Equilibrium Price

P 1

Q 1

P 2

Q SQ D

Surplus

Economics for Leaders

Price

Quantity

Demand Supply

Market Clearing or Equilibrium Price

P 1

Q 1

P 2

Q S Q D

Shortage

Economics for Leaders

Consumer surplus

X

PX

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

Economics for Leaders

Economics for Leaders

Economics for Leaders