Markets

EFL: Lesson 3Markets1Consumers in MarketsDemand =

Desire for a productWillingness and ability to pay for it

2Price As An Incentive for ConsumersDemand for CDsPrice QaQbQt$35336$204610$1351015$7616223Graphs: Pictures of DemandDaDbDtPriceQuantity Demanded (QD)How much will people buy at this price?4The Law of DemandIf Price increases then Quantity Demanded goes down.If Price decreases then Quantity Demanded goes up.

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)5AssumptionEverything else remains the same6What If Everything Else Doesnt Stay the Same?Demand for CDs AFTER something has changed; Your pay at your job doubles, for example.PriceQa QbQt$35549$207714$1381119$71016267Shifting Demand and Supply What things besides price affect how much people buy?

8Demand Shifters Tastes and preferences Numbers of consumersPrice of substitutes Prices of complementsExpectations of future prices Income 9Demand Shifters: ExamplesWhat 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?10Consumers Are Only the MarketSupply11What Incentive Do Producers have to make (Any or More) of a Product?Producers are in business to make. PROFITProducers will make more of a product only if that decision increases PROFITMarginal Benefits (MB) and Marginal Cost (MC)MB>MC => this is good, so make more.MB < MC => not good, so make less.12Price An Incentive for ProducersProducers of CDs

PriceQaQbQt$7538$138715$2011920$3520143413The Law of SupplyIf Price increases then Quantity Supplied goes up.If Price decreases then Quantity Supplied goes down.

If P then QS If P then QS

Remember: Producers can substitute, too.Note: What causes the change in the producers behavior?(Think: Price Effect)14Graphs: Picture of SupplyPriceQuantity Supplied (QS)

How much will producers offer for sale at this price?0SaSbSt15AssumptionEVERYTHING ELSE REMAINS THE SAME16Shifting SupplyWhat besides price affects producers willingness to offer products for sale?17What If Everything Else DOESNT Stay the Same?Supply of CDs AFTER Something has changed. Price of labor goes up by $2 per hour.Price QaQbQt$7325$136612$209817$3518133118Supply ShiftersCosts of productionResource availability changesTechnology changesPolicies change (taxes, for example)Number of suppliersPrices of production substitutes Producer could make more money producing other things (grow corn instead of soybeans, for example)In WWII auto factories switched to making tanks.Suppliers expectations about the futureprediction of bad hurricane seasonminimum wage is going to go up19Supply Shifters: ExamplesWhat will happen to the supply of hotdogs if the price of hotdog buns increase? 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 destroy many forest areas? Why?20Equilibrium PriceThe Price at which the amount (quantity) people want to buy= the amount (quantity) producers want to sell.QD=QS21Market EquilibriumAt market equilibrium, there is no force for change (ceteris peribus)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.22Shifts and Changing EquilibriumS1SDPQP**P*Q**Q*An decrease in supply causes an increase in market price and a decrease in quantity demanded, ceteris paribus.23Shifts and Changing EquilibriumSD1DPP**P*Q*Q**An increase in demand causes an increase in market price and an increase in quantity demanded, ceteris paribus.24Markets are dynamic.Market prices arent set; they happen25

Buyers DONT Compete With Sellers . . .

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Buyers Compete with Buyers

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Sellers Compete with Sellers

28Market Competition: Win-Win Outcomes

Both buyers and sellers value what they received more than what they gave up.29Economic Reasoning Principle # 4: Institutions are the rules of the game that influence choices.Laws, customs, moral principles, superstitions, and cultural values influence peoples choices. These basic institutions controlling behavior set out and establish the incentive structure and the basic design of the economic system.

30Institutions necessary for well-functioning markets:Property RightsRule of Law

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How Market Competition Benefits the PoorIt makes more goods and services available at lower prices.The presence of other competitors (actual or potential) provides incentives for innovationIt provides opportunities for the poor as workers.It provides opportunities for the poor as entrepreneurs.

32Ideas to Take Away from Lesson 3:Open markets benefit both buyers and sellers by providing a low cost mechanism for trade.Open entry and exit and competition are necessary for markets to function effectively.Clearly defined property rights and stable rule of law are necessary for markets to function at low cost to participants.Open markets encourage economic growth.

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