Economics for Leaders

1. Economics for Leaders Lesson 3: Open Markets

3. Choose Between Alternatives • People do things that make them better off. • Do it if…… • MB > MC

4. 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

5. 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

6. The World is Full of People

7. The World is Full of People

8. Let’s Graph it

9. 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

10. 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

11. The World is Full of People

12. The World is Full of People

13. Let’s Graph it

14. 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

15. How Do Markets Work? • Buyers • 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. • Sellers

16. Equilibrium • Buyers • Sellers

17. Equilibrium • Buyers • Sellers

18. Dis-quilibrium • Buyers • Sellers

19. Dis-quilibrium • Buyers • Sellers

20. Buyers Equilibrium • Sellers

21. 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. Markets Typically Do A Good Job Of Rationing

22. 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

23. ↑ T&P • D shifts right • shortage at P1 • Δ D • Disequilibrium • P adjusts • Qs responds • Law of S • P ↑ to restore equilibrium (sellers respond, Qs ↑) • new equilibrium: higher P & higher Q

24. 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

25. ↑ P input • S shifts left • shortage at P1 • Δ S • Disequilibrium • P adjusts • Qd responds • Law of D • P ↑ to restore equilibrium (buyers respond, Qd ↓) • new equilibrium: higher P & lower Q

27. 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. Big Ideas

28. 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. Big Ideas