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

Economics for Leaders


Open Markets


How much should we do?

WorkPlayStudySleep


As long as the marginal benefit is greater than the marginal cost you should continue the activity

MB=MC


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.


Consumers in Markets

desire for a product

willingness and ability to pay for it

++Demand =


How are prices set?

By the Market!Interaction of buyers (consumers) and sellers (producers).


Necessary conditions for markets

Property RightsClear “Rules of the Game”Freedom to ExchangeInformation


Demand

Willingness and ability to purchase goods at various prices.


The Law of Demand

If P then QD andIf P then QD

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

(think: price effect)


Pictures of Demand

Price

QD

0

$8

90


What influences demand?

(Demand Shifters)Taste and preferenceSubstitutesIncome Population


Assumption:

EVERYTHINGEVERYTHINGELSE

REMAINSTHE

SAME


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?


Consumers Are Only ½ the Market

SupplySupply


Supply

Willingness and ability of producers to sell various quantities of goods and services a various prices.


The Law of Supply

If P then QS andIf P then QS

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

(think: price effect)


What influences supply ?

Costs of productionlabor

materialsfacilitiestools and

machines


Pictures of Supply

Price

Qs

0

$8

75


Assumption:

EVERYTHINEVERYTHINGG

ELSEREMAINS

THESAME


Supply shifters

costs of production– resource availability changes– technology changes– policies change (taxes, for example)

numbers of suppliers


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?


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


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


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



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


Student supply of labor

Supply schedulePrice Quantity supplied

(average/per person)

$ 10 129.3$ 35 184.9


Supply of Labor

Price

Quantity

$35

$10

50 100 175 200

Student supply


Supply of Labor

Price

Quantity

$35

$10

50 100 175 200

Student supplyTeacher supply



Price

Quantity1 3 6 11 15 20 23 29 31

$2,500

$1,800

$1,500

$1,100

$ 900

$ 700

$ 500

$ 150

$ 20

Supply


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


Price

Quantity

Demand Supply

Market Clearing or Equilibrium Price

P 1

P 2


1.Markets are dynamic.

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

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


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.


Institutions necessary for well-functioning markets:

Property rights Rule of law


Price

Quantity

Demand Supply


P 1

Q 1

P 2

Q SQ D

Surplus


Price

Quantity

Demand Supply


P 1

Q 1

P 2

Q S Q D

Shortage


Consumer surplus

X

PX

CS

CS = the extra value individuals receive from consuming a good over what they pay for it.

Tomas Cvrcek

To measure the overall level of welfare in the economy we will employ concepts that we have kinda seen before. One of them is the concept of consumer surplus that we have seen in connection with demand. Here we merely remind ourselves of the concept.


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

Tomas Cvrcek

The counterpart on the producer side is producer surplus the definition of which is in the right part of the screen. It, too, can be represented graphically, as the triangle above the supply curve and below the price.

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

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