Download - 3/8/12
Economics for Leaders
3/8/12
BR: Explain how BR: Explain how “substitution” works“substitution” works
Today: Finish yesterdayToday: Finish yesterday
Economics for Leaders
The Law of Demand
If P then QD andIf P then QD
Note: What causes the change in the consumers’ behavior ?
(think: price effect)
Consumers substitute – and there are substitutes for everything (at the margin)
Economics for Leaders
Price As An Incentive for Consumers
Price Qa Qb Qt
$35 3 3 6
$20 4 6 10
$13 5 10 15
$7 6 15 21
Demand for CDs
Economics for Leaders
Graphs: Pictures of Demand
Price
0 Quantity Demanded (QD)
How much will people buy at this price?
DaDb Dt
Economics for Leaders
The Law of Demand
If P then QD andIf P then QD
Note: What causes the change in the consumers’ behavior ?
(think: price effect)
Consumers substitute – and there are substitutes for everything (at the margin)
Economics for Leaders
What If “Everything Else” DOESN’T Stay the Same?
Price Qa Qb Qt
$35 5 4 9
$20 7 7 14
$13 8 11 19
$7 10 16 26
Demand for CDs AFTER Something has changed: Your pay at your job doubles, for example.
Demand shifters
tastes and preferences numbers of consumers prices of substitutes
(coffee & tea)prices of complements
(peanut butter & jelly)expectations of future pricesincome
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?
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 moreMB < MC not good, so make less
PROFIT
PROFIT
Economics for Leaders
Price An Incentive for Producers
Price Qa Qb Qt
$7 5 3 8
$13 8 7 15
$20 11 9 20
$35 20 14 34
Producers of CDs
Economics for Leaders
The Law of Supply
If P then QS andIf P then QS
Note: What causes the change in the producers’ behavior ?
(think: price effect)
Remember: Producers can
substitute, too.
Economics for Leaders
Graphs: Pictures of Supply
Price
0 Quantity Supplied (QS)
How much will producers offer for sale at this price?
SaSb
St
Economics for Leaders
What If “Everything Else” DOESN’T Stay the Same?
Price Qa Qb Qt
$7 3 2 5
$13 6 6 12
$20 9 8 17
$35 18 13 31
Supply of CDs AFTER Something has changed. Price of labor goes up by $2 per hour.
Supply shifters
costs of productionresource availability changestechnology changespolicies 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”
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?
Exit Slip:
1. What is the law of demand
2. Describe one example of how price can shift, demand can shift.
3. What roles do substitutes play in supply and demand (think margin)?
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 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.
Economics for Leaders
Shifts and changing equilibrium
Q
P
Q*
P*
D
S
S’
An deacrese in supply causes an increase in market price and a decrease in quantity demanded, ceteris paribus.
Q**
P**
Economics for Leaders
Shifts and changing equilibrium
Q
P
Q*
P*
D
S
D’
An increase in demand causes an increase in market price and an increase in quantity demanded, ceteris paribus.
Q**
P**
Economics for Leaders
1.Markets are dynamic.
2.Market prices aren’t set; they happen!
http://www.youtube.com/watch?v=Ng3XHPdexNM
Economics for Leaders
Market Competition: Win-Win Outcomes
Both buyers and sellers value what they received more than what they gave up.
Economics for Leaders
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.
Economics for Leaders
Institutions necessary for well-functioning markets:
Property rights Rule of law
Economics for Leaders
1.They make more goods and services available at lower prices.
2.The presence of other competitors (actual or potential) provides incentives for innovation
3.Markets provides opportunities for the poor as workers.
4.Markets provides opportunities for the poor as entrepreneurs.
Open Markets Benefit the Poor
The “Big Ideas” from Lesson 3:
1. Open markets benefit both buyers and sellers by providing a low cost mechanism by which they can trade with one another
2. Open markets benefit the poor by encouraging economic growth
3. Open entry and exit with competition make markets efficient.
4. Money price rations goods in markets.5. Clearly defined property rights and rule of law are
necessary for this process to work