EFL: Lesson 3 Markets

Consumers in Markets Demand = Desire for a product Willingness and ability to pay for it

Price As An Incentive for Consumers Demand for CDs PriceQaQbQt $35336 $ $ $761622

Graphs: Pictures of Demand Da Db Dt Price Quantity Demanded (QD) How much will people buy at this price?

The Law of Demand If Price increases then Quantity Demanded goes down. If Price decreases then Quantity Demanded goes up. P Then QD Consumers substitute and there are substitutes for everything (at the margin). Note: What causes the change in the consumers’ behavior? (Think: Price Effect)

Assumption Everything else remains the same

What If “Everything Else” Doesn’t Stay the Same? Demand for CDs AFTER something has changed; Your pay at your job doubles, for example. PriceQaQbQt $35549 $ $ $

Shifting Demand and Supply What things besides price affect how much people buy?

Demand Shifters Tastes and preferences Numbers of consumers Price of substitutes Prices of complements Expectations of future prices Income

Demand Shifters: Examples What will happen to the demand for hotdogs if the price of hotdog buns increases? What will happen to the demand for hamburger if the price of hotdogs increases?

Consumers Are Only ½ the Market Supply

What Incentive Do Producers have to make (Any or More) of a Product? Producers are in business to make…. PROFIT Producers will make more of a product only if that decision increases…… PROFIT Marginal Benefits (MB) and Marginal Cost (MC) MB>MC => this is good, so make more. MB not good, so make less.

Price An Incentive for Producers Producers of CDs PriceQaQbQt $7538 $ $ $

The Law of Supply If Price increases then Quantity Supplied goes up. If Price decreases then Quantity Supplied goes down. If P then QS Remember: Producers can substitute, too. Note: What causes the change in the producers’ behavior? (Think: Price Effect)

Graphs: Picture of Supply Price Quantity Supplied (QS) How much will producers offer for sale at this price? 0 Sa SbSt

Assumption EVERYTHING ELSE REMAINS THE SAME

Shifting Supply What besides price affects producers’ willingness to offer products for sale?

What If “Everything Else” DOESN’T Stay the Same? Supply of CDs AFTER Something has changed. Price of labor goes up by $2 per hour. PriceQaQbQt $7325 $ $ $

Supply Shifters Costs of production Resource availability changes Technology changes Policies change (taxes, for example) Number of suppliers Prices of production substitutes Producer could make more money producing other things (grow corn instead of soybeans, for example) In WWII auto factories switched to making tanks. Suppliers’ expectations about the future “prediction of bad hurricane season” “minimum wage is going to go up”

Supply Shifters: Examples What will happen to the supply of hotdogs if the price of hotdog buns increase? Why? 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 destroy many forest areas? Why?

Equilibrium Price The Price at which the amount (quantity) people want to buy= the amount (quantity) producers want to sell. QD=QS

Market Equilibrium At market equilibrium, there is no force for change (ceteris peribus) All those willing and able to buy at the market price were able to buy all they wanted. All those willing and able to sell at the market price sold all they had. The units sold brought at least as much value to the buyers as they cost the producers. Everybody gained.

Shifts and Changing Equilibrium S1 S D P Q P** P* Q**Q* An decrease in supply causes an increase in market price and a decrease in quantity demanded, ceteris paribus.

Shifts and Changing Equilibrium S D1 D P P** P* Q*Q** An increase in demand causes an increase in market price and an increase in quantity demanded, ceteris paribus.

1. Markets are dynamic. 2. Market prices aren’t set; they happen

Buyers DON’T Compete With Sellers...

Buyers Compete with Buyers

Sellers Compete with Sellers

Market Competition: Win-Win Outcomes Both buyers and sellers value what they received more than what they gave up.

Economic Reasoning Principle # 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 RightsRule of Law

How Market Competition Benefits the Poor 1. It makes more goods and services available at lower prices. 2. The presence of other competitors (actual or potential) provides incentives for innovation 3. It provides opportunities for the poor as workers. 4. It provides opportunities for the poor as entrepreneurs.

Ideas to Take Away from Lesson 3: Open markets benefit both buyers and sellers by providing a low cost mechanism for trade. Open entry and exit and competition are necessary for markets to function effectively. Clearly defined property rights and stable rule of law are necessary for markets to function at low cost to participants. Open markets encourage economic growth.