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Economics for Leaders. Lesson 3: Open Markets. Choose Between Alternatives. People do things that make them better off. Do it if…… MB > MC. Where do prices come from?. Prices are the result of interaction between buyers and sellers (demanders and suppliers).

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economics for leaders

Economics for Leaders

Lesson 3: Open Markets

choose between alternatives
Choose Between Alternatives
  • People do things that make them better off.
  • Do it if……
  • MB > MC
where do prices come from
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
production supply
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
law of supply
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
consumption demand
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
law of demand
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
how do markets work
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
equilibrium
Equilibrium
  • Buyers
  • Sellers
equilibrium1
Equilibrium
  • Buyers
  • Sellers
dis quilibrium
Dis-quilibrium
  • Buyers
  • Sellers
dis quilibrium1
Dis-quilibrium
  • Buyers
  • Sellers
slide20

Buyers

Equilibrium

  • Sellers
markets typically do a good job of rationing
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
what if something changes
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
slide23
↑ 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
what if something changes1
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
slide25
↑ 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
big ideas
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
big ideas1
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