1. EFL Lesson 3
Markets

2. + Consumers in Markets Demand = desire for a product
willingness and ability to pay for it
desire for a product

3. Price As An Incentive for Consumers
Demand for CDs
Price Qa Qb Qt
$35 3 6
$20 4 10
$13 5 15 $7 21

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

5. Note: What causes the change in the consumers’ behavior ?
The Law of Demand
Consumers substitute – and there are substitutes for everything (at the margin)
If P then QD
and
Note: What causes the change in the consumers’ behavior ?
(think: price effect)

6. Assumption: CLICK ! It's a new picture. EVERYTHING ELSE REMAINS THE
SAME
CLICK !
It's a new
picture.

7. What If “Everything Else” DOESN’T Stay the Same?
Demand for CDs AFTER Something has changed: Your pay at your job doubles, for example.
CLICK !
It's a new
picture.
Price Qa Qb Qt
$35 5 4 9
$20 7 14
$13 8 11 19 $7 10 16 26

8. Shifting Demand and Supply
CLICK !
It's a new
picture.
What things besides price affect how much people buy?

9. Demand shifters tastes and preferences numbers of consumers
prices of substitutes
(coffee & tea)
prices of complements
(peanut butter & jelly)
expectations of future prices
income

10. 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?

11. Consumers Are Only ½ the Market
Supply

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

13. Price An Incentive for Producers
Producers of CDs
Price Qa Qb Qt $7 5 3 8
$13 7 15
$20 11 9 20
$35 14 34

14. The Law of Supply Remember: Producers can substitute, too.
If P then QS
and
If P then QS
Remember:
Producers can substitute, too.
Note: What causes the change in the producers’ behavior ?
(think: price effect)

15. Graphs: Pictures of Supply
Price ≈ Sa Sb St
Quantity Supplied (QS)
How much will producers offer for sale at this price?

16. Assumption: CLICK ! It's a new picture. EVERYTHING ELSE REMAINS THE
SAME
CLICK !
It's a new
picture.

17. Shifting Supply CLICK ! It's a new picture.
What besides price affects producers’ willingness to offer products for sale?
CLICK !
It's a new
picture.

18. 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.
CLICK !
It's a new
picture.
Price Qa Qb Qt $7 3 2 5
$13 6 12
$20 9 8 17
$35 18 13 31

19. Supply shifters costs of production resource availability changes
technology changes
policies change (taxes, for example)
numbers of suppliers
prices of production substitutes
producer could make more money producing other things (grow corn instead of soybeans, for example)
In WW2 auto factories switched to making tanks
suppliers’ expectations about the future
“prediction of bad hurricane season”
“minimum wage is going to go up”

20. Supply shifters: Examples
What will happen to the supply of hotdogs if the price of hotdog buns increases? 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 destroys many forest areas? Why?

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

22. Market equilibrium
At market equilibrium, there is no force for change (ceteris paribus).
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.

23. Picture of CD Market St
Price QD ≈
$20
$13 $7 Dt 15

24. Shifts and changing equilibriumP S
An increase in supply causes an increase in market price and a decrease in quantity demanded, ceteris paribus.
P** P* D Q*
Q** Q

25. Shifts and changing equilibriumP S
An increase in demand causes an increase in market price and an increase in quantity demanded, ceteris paribus.
P** D’ P* D Q*
Q** Q

26. Market prices aren’t set; they happen!
Markets are dynamic.
Market prices aren’t set; they happen!

27. Effect of Competition St
Price QD ≈
Stc
$20
$13 $7 Dt 15 21

28. Sellers Compete with Other Sellers
How do they compete?

29. Buyers Compete with Other Buyers
How do they compete?

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

31. 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.

32. Institutions necessary for well-functioning markets:
Property rights
Rule of law

33. Open Markets Benefit the Poor
They make more goods and services available at lower prices.
The presence of other competitors (actual or potential) provides incentives for innovation
Markets provides opportunities for the poor as workers.
Markets provides opportunities for the poor as entrepreneurs.

34. The “Big Ideas” from Lesson 3:
Open markets benefit both buyers and sellers by providing a low cost mechanism by which they can trade with one another
Open markets benefit the poor by encouraging economic growth
Open entry and exit with competition make markets efficient.
Money price rations goods in markets.
Clearly defined property rights and rule of law are necessary for this process to work