Economics for Leaders

1. Economics for Leaders Magic of Markets

2. 5 Economic Reasoning Propositions • People Choose, and individual choices are the source of social outcomes. • Choices impose costs; people receive benefits and incur costs when they make decisions • People respond to incentives in predictable ways.

3. 5 Economic Reasoning Propositions • Institutions are the “Rules of the Game” that influence choices • Understanding based on knowledge and evidence imparts value to opinions.

4. Institutions that foster growth and Economic Development: • Open Markets • Property Rights • Rule of Law • Entrepreneurship and Innovation

5. Why do people trade?

6. Why do people trade?

7. Was it possible to trade without bearing a cost?

8. What are the necessary conditions for wealth creating to take place? Think INSTITUTIONS! “Rules of the Game” • Property Rights • Voluntary Exchange

9. Does the creation of wealth make EVERYONE happy?

10. Assessment: If we were to observe twenty people buying items at an outdoor Farmers market, what could we conclude about their gains and losses? What could we conclude about their wealth?

11. Economics for Leaders Practice With Opportunity Cost

12. Characteristics of Cost • Costs are to people. All costs are costs to the decision-maker • Costs are subjective; individuals value costs differently • Opportunity costs may change and changes in costs affect people’s choices

13. Characteristics of Cost • Only actions have costs. “Things” have no costs independent of decisions about their use. • All costs lie in the future. The anticipation of future consequences shapes people’s decisions.

14. Characteristics of Cost • Opportunity cost is the value of the next best alternative not chosen. • It’s what you give up or forgo when you make a choice.

15. Characteristics of Cost • When you’re tempted to identify the opportunity cost as time or money, think instead of what you would do with that time or what else you would spend that money on.

16. Discussion: Choosing a Snack • What were the considered alternatives of your choice? • If someone made a different choice (diff. snack or no snack) than you did, did one person make the right choice and one the wrong choice?

17. Suppose an ice cream bar had been offered as an alternative along with 2 types of candy. • Would your opportunity cost have changed? Why or why not? • What is the opportunity cost to the person who chose the ice cream bar from among the 3 options? • What is the opportunity cost to someone who sticks with their original choice when the ice cream bar is included in the alternatives?

18. . Discussion: Choosing a Snack Suppose the “rules of the game” had been that “the class” could choose one snack, and the choice was Candy A • Does that configuration of the situation change the opportunity cost? (If so, in what way and to whom?)

19. . Discussion: Choosing a Snack Suppose all 4 types of snack had been on one table and everyone could select from that table. • Would that change your opportunity cost? Why? • Is the availability of a grater number of alternatives likely to increase or decrease opportunity costs? Why?

20. Practice with Opportunity Cost • Why would a student choose not to study for an exam even though she knows from past experience that she performs better on exams when she has spent time studying?

21. Practice with Opportunity Cost • Why would a teenager not ask to a dance the person he’d like to ask, even though he knows she does not have another date?

22. Practice with Opportunity Cost • Why would a hot dog vender on a New York street corner lower the price of dogs late in the day?

23. Practice with Opportunity Cost • Why do Americans today find themselves much more pressed for time than their great-grandparents were, despite the fact that we have so many machines and appliances that save us labor and time?

24. Practice with Opportunity Cost • Why would a poor family in a developing country choose to send a 10-year-old to work in a factory rather than to school, even though they know that being able to read and write would offer the child better options for the future?

25. Practice with Opportunity Cost • Why do so many more inventions and innovations come from western countries where property rights are secure than from developing and communist countries where they are not?

26. Practice with Opportunity Cost • Why are people in some parts of the world willing to work for $1 per day and in the U.S. employers often have trouble finding people willing to work minimum wage jobs?

27. Economics for Leaders In The Chips

28. How to Play “In the Chips” • Players’ goal in the activity is to make as much profit as they can over the course of the game. • Buyers: Each buyer will have only one buyer card at a time. It will say, “You are authorized to buy a box of computer chips. Pay as little as possible. If you pay more than ______ per box, you lose money.” To make a “profit,” buy at a price lower than the price shown on your card. If you buy at a higher price, you suffer a loss. • DO NOT REVEAL THE PRICE.

29. How to Play “In the Chips” • Record the buyer card price on your student score sheet. • When the round starts, try to buy below your buyer-card price – the lower, the better. (You may buy at a price higher than that on your buyer card in order to obtain chips, but note that this will reduce your “profit” for the round.) When you make a purchase, record the transaction price on your score sheet. Then, turn in the buyer card and get another buyer card from the buyer pile.

30. How to Play “In the Chips” • Sellers: Each seller will have only one seller card at a time. It will say, “You are authorized to sell one box of computer chips for as much as possible. If you accept less than ______ per box you lose money.” To make profit, sell at a price higher than the price shown on your card. If you sell at a lower price, you suffer a loss. • DO NOT REVEAL THE PRICE. • Record the seller card price on your student score sheet.

31. How to Play “In the Chips” • When the round starts, try to sell above your seller-card price – the higher, the better. (You may sell at a price lower than that on your seller card to get rid of your chips, but note that this will reduce your profit for the round.) When you make a sale, you must: • report the transaction price to the person keeping the Market Tally Sheet in the front of the room; • record the transaction price on your score sheet, and then • turn in your seller card you have and get another from the seller pile. • Remember –seller reports transaction price.

32. How to Play “In the Chips” • When the teacher says “Start,” sellers and buyers are free to move around the room and to make transactions with one another. Any seller may talk with any buyer. • Both buyers and sellers are free to make as many transactions as they want in a round. For tallying purposes, please make all transactions in ten cent increments. Remember to trade in your card after each transaction. • During the game, keep track of your progress on the student score sheet. Compute your gains and losses by taking the difference between the price on your buyer or seller card and the price of the transaction.

33. Let’s Play!

34. Debriefing • Who made money? • Who lost money? • Who made the most money? • Strategies? • Who lost money? • Why? • What conditions made the market work well? • Equal number of buyers and sellers • like products for sale • equal or full knowledge about the products • clear rules concerning what you could and could not do in the market

35. What can you tell me about price in the various rounds? • What was the most frequent transaction price in each round? •  In which round was there the greatest spread in transaction prices? Why? •  Why did the transaction prices become more clustered in the final rounds?

36. Who determined the “market price” for computer chips? • Buyers… where would you have set the price if they'd had the power to do so? • Sellers? • Would you describe this as a competitive market? • Who was in competition with whom?

37. How does opportunity cost explain a high price on a seller card? A low price on a buyer card?

38. Economics for Leaders Market for Thingamajigs

39. How to Play… • BUYERS • Goal: PROFIT • Each buyer will have only one buyer card at a time. The card will allow you to buy ONE thingamajig and will tell you how much you value it. To make a “profit,” buy at a price lower than the price shown on your card. If you buy at a higher price, you suffer a loss. • DO NOT REVEAL THE PRICE. • Record the buyer card price on your student score sheet. • When the round starts, try to buy below your buyer-card price – the lower, the better. (You may buy at a price higher than that on your buyer card, but note that this will reduce your “profit” for the round.) • When you make a purchase, record the transaction price on your score sheet. Then, turn in the buyer card and get another buyer card from the buyer pile.

40. How to Play… • Sellers • Goal: PROFIT • At the beginning of each round, each seller will be given an inventory of Thingamajigs and a role card with the cost per thingamajig. To make profit, sell at a price higher than the cost. If you sell at a lower price, you suffer a loss. • DO NOT REVEAL THE PRICE. • Record the seller card price on your student score sheet.

41. How to Play… • BUYERS & SELLERS • All stores are open to all buyers. • When a buyer and seller agree on a price, they record the transaction on their transaction records, and the seller gives the Thingamajig to the buyer. • The BUYER must then report the transaction by turning in the Thingamajig card to the person keeping the Market Tally in the front of the room. The buyer may then exchange his buyer card for another and try to make another purchase.

42. How to Play… • BUYERS & SELLERS • When the teacher says “Start,” sellers and buyers are free to move around the room and to make transactions with one another. Any seller may talk with any buyer. • Both buyers and sellers are free to make as many transactions as they want in a round. Buyers, remember to turn in your Thingamajig card to the tally keeper and get a new buyer card after each transaction. • During the game, keep track of your progress on the student score sheet. Compute your gains and losses by taking the difference between the price on your buyer or seller card and the price of the transaction.

43. Let’s Play! • ROUND 1

44. Let’s Play! • ROUND 1 • ROUND 2 • ROUND 3 • ROUND 4

45. Transaction Tally

46. Economics for Leaders j Cartels & Competition

47. The Producers… • 6 companies… • do 98% of the business in this industry.

48. The Producers • Your goal: make as much profit as possible • Prizes for ALL companies that earn MORE than $200 profit! • Additional prize for company that earns the MOST profit!

49. Demand Forecast Market Demand (QD) 0 – 6 7 – 13 14 – 19 20 – 26 27 – 32 33 – 40 41 – 50 Price $125 $100 $75 $50 $30 $25 $20

50. Production Decision Worksheet Let’s Practice…