Economics for Leaders Lesson 3: Open Markets. Economics for Leaders Choose Between Alternatives...

Economics for Leaders


Lesson 3: Open Markets


Choose Between Alternatives

People do things that make them better off.

Do it if……

MB > MC


Where do prices come from?

Prices are the result of interaction between buyers and sellers (demanders and suppliers).

Prices are determined in the marketplace.

We will see this happen ourselves very soon!

MB > MC


Production (Supply)


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

The World is Full of People

Let’s Graph it


Law Of Supply

sellers could produce other things

price → opportunity cost

high price → produce more

higher price means more incentive to produce this good relative to what else you could do

supply represents marginal (opportunity) cost willingness to sell (corn/ethanol)

Sellers


Consumption (Demand)


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

The World is Full of People

Let’s Graph it


Law Of Demandconsumers could purchase 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 (compared to alternatives) willingness to pay (gasoline)

Buyers


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


EquilibriumBuyers Sellers

Dis-quilibriumBuyers Sellers


Buyers SellersEquilibrium


Markets Typically Do A Good Job Of Rationing

Goods go to those with the highest value.

Goods are produced by those with the lowest opportunity cost.

Voluntary trade increases well-being.

Society’s well-being is maximized.


In The ChipsP Qd Qs

3.50 35 43.70 33 113.90 31 184.10 29 234.30 27 274.50 23 294.70 18 314.90 11 335.10 4 35

IN THE CHIPS: S & D

3.30

3.50

3.70

3.90

4.10

4.30

4.50

4.70

4.90

5.10

5.30

0 4 8 12 16 20 24 28 32 36

Quantity

Pri

ce

Qd

Qs


Property rights, information, interaction and competition.

Price squeezes to where Qs = Qd & market clears.

This price facilitates all transactions that can make both a buyer and a seller better off.



Goods go to consumers with the highest value.

Goods are produced by the sellers with the lowest opportunity cost.

The well-being of society is maximized.

Profit is the Motivator!Competition is the Regulator!



What If Something Changes?

price

income, price of other goods, tastes & preferences

Recall the market for ice cream.

Suppose the weather gets hotter.

What would you expect to happen?

Buyers

↑ T&P

D shifts right

shortage at P1

Price ofIce-Cream

Cone

Quantity of Ice-Cream Cones

SupplySupply

Initialequilibrium

Initialequilibrium

DD

DD

3. . . . and a higherquantity sold.3. . . . and a higherquantity sold.

2. . . . resultingin a higherprice . . .



1. Hot weather increasesthe demand for ice cream . . .1. Hot weather increasesthe demand for ice cream . . .

2.00

7

2.00

7

New equilibrium$2.50

10

New equilibrium$2.50

10

$2.50

10

P ↑ to restore equilibrium (sellers respond, Qs ↑)new equilibrium: higher P & higher Q

Δ DDisequilibriumP adjustsQs respondsLaw of S


What If Something Changes?

price

price of inputs, technology, weather

Recall the market for ice cream.

Suppose the price of sugar increases.

What would you expect to happen?

Sellers

↑ P input

S shifts left

shortage at P1

P ↑ to restore equilibrium (buyers respond, Qd ↓)new equilibrium: higher P & lower Q

Δ SDisequilibriumP adjustsQd respondsLaw of D

Price ofIce-Cream

Cone

Quantity of Ice-Cream Cones

DemandDemand

Newequilibrium

Newequilibrium

Initial equilibrium

S1S1

S2S2

2. . . . resultingin a higherprice of icecream . . .




1. An increase in theprice of sugar reducesthe supply of ice cream. . .

1. An increase in theprice of sugar reducesthe supply of ice cream. . .

3. . . . and a lowerquantity sold.3. . . . and a lowerquantity sold.

2.00

7

2.00

7

$2.50

4

$2.50

4


Big IdeasScarcity implies/necessitates rationing.Rationing implies/necessitates competition.

Markets coordinate information & competition.

Markets allocate scarce resources to the production of the goods and services.

Markets distribute produced goods and services to society.


Big Ideas

Goods go to consumers with the highest value.

Goods are produced by sellers with the lowest opportunity cost.

The well-being of society is maximized.

Markets dynamically adjust to reflect changes in relative scarcity and preferences.

People respond to incentives in predictable ways.

Economics for Leaders Lesson 3: Open Markets. Economics for Leaders Choose Between Alternatives...

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