3/8/12

1. 3/8/12 BR: Explain how “substitution” works Today: Finish yesterday

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

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

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

5. Price As An Incentive for Consumers Demand for CDs

6. Price ≈ ≈ 0 Graphs: Pictures of Demand Db Dt Da Quantity Demanded (QD) How much will people buy at this price?

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

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

9. CLICK ! It's a new picture. What If “Everything Else” DOESN’T Stay the Same? Demand for CDs AFTER Something has changed: Your pay at your job doubles, for example.

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

11. 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?

12. Consumers Are Only ½ the Market Supply

13. 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

14. Price An Incentive for Producers Producers of CDs

15. The Law of Supply 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)

16. Price ≈ ≈ 0 Graphs: Pictures of Supply Sa Sb St Quantity Supplied (QS) How much will producers offer for sale at this price?

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

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

19. CLICK ! It's a new picture. 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.

20. 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”

21. 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?

22. Exit Slip: What is the law of demand Describe one example of how price can shift, demand can shift. What roles do substitutes play in supply and demand (think margin)?

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

24. 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.

25. Price ≈ ≈ 0 QD Picture of CD Market St $20 $13 $7 Dt 15

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

27. Shifts and changing equilibrium P 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

28. Markets are dynamic. • Market prices aren’t set; they happen! http://www.youtube.com/watch?v=Ng3XHPdexNM

29. Price ≈ ≈ 0 QD Effect of Competition St Stc $20 $13 $7 Dt 15 21

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

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

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

33. 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.

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

35. 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.

36. 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