Economics for Leaders Lesson 3: Open Markets

Economics for Leaders Choose Between Alternatives People do things that make them better off. Do it if…… MB > MC

Economics for Leaders 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

Economics for Leaders Production (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

The World is Full of People

Let’s Graph it

Economics for Leaders 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

Economics for Leaders Consumption (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

The World is Full of People

Let’s Graph it

Economics for Leaders Law Of Demand consumers 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

Economics for Leaders 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

Economics for Leaders Equilibrium BuyersSellers

Economics for Leaders Equilibrium BuyersSellers

Dis-quilibrium BuyersSellers

Dis-quilibrium BuyersSellers

Economics for Leaders BuyersSellers Equilibrium

Economics for Leaders 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.

Economics for Leaders In The Chips

Economics for Leaders

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. Equilibrium BuyersSellers

Economics for Leaders 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! Equilibrium BuyersSellers

Economics for Leaders 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 P ↑ to restore equilibrium (sellers respond, Qs ↑ ) new equilibrium: higher P & higher Q Δ D Disequilibrium P adjusts Qs responds Law of S

Economics for Leaders 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 S Disequilibrium P adjusts Qd responds Law of D

Economics for Leaders Big Ideas Scarcity 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.

Economics for Leaders 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.