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3/7/12 BR: Why is gold so valuable? Today: What is the Law of Demand? 3/7/12 BR: Why is gold so valuable? Today: What is the Law of Demand? What causes “shift? ” Economics for Leaders

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

The Law of Demand If P then QD and then QD Consumers substitute – The Law of Demand If P then QD and 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) Economics for Leaders

Shifting Demand Supply What things besides price affect how much people buy? Shifting Demand Supply What things besides price affect how much people buy?

Price As An Incentive for Consumers Demand for CDs Price Qa Qb Qt $35 Price As An Incentive for Consumers Demand for CDs Price Qa Qb Qt $35 3 3 6 $20 4 6 10 $13 5 10 15 $7 6 15 21 Economics for Leaders

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

The Law of Demand If P then QD and then QD Consumers substitute – The Law of Demand If P then QD and 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) Economics for Leaders

Assumption: EVERYTHING ELSE REMAINS THE SAME Economics for Leaders Assumption: EVERYTHING ELSE REMAINS THE SAME Economics for Leaders

What If “Everything Else” DOESN’T Stay the Same? Demand for CDs AFTER Something has What If “Everything Else” DOESN’T Stay the Same? Demand for CDs AFTER Something has changed: Your pay at your job doubles, for example. Price Qa Qb Qt $35 5 4 9 $20 7 7 14 $13 8 11 19 $7 10 16 26 Economics for Leaders

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

Demand shifters: examples What will happen to the demand for hotdogs if the price 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?

Consumers Are Only ½ the Market Supply Consumers Are Only ½ the Market Supply

What Incentive Do Producers have to make (Any or More) of a Product? Producers What Incentive Do Producers have to make (Any or More) of a Product? Producers are in business to make… PROFIT Producers will make more of a product only if that decision increases… PROFIT Marginal Benefits (MB) and Marginal Cost (MC) MB > MC MB < MC this is good, so make more not good, so make less

Price An Incentive for Producers of CDs Price Qa Qb Qt $7 5 3 Price An Incentive for Producers of CDs Price Qa Qb Qt $7 5 3 8 $13 8 7 15 $20 11 9 20 $35 20 14 34 Economics for Leaders

The Law of Supply If P then QS and then QS Remember: Producers can The Law of Supply If P then QS and then QS Remember: Producers can substitute, too. Note: What causes the change in the producers’ behavior ? (think: price effect) Economics for Leaders

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

Assumption: EVERYTHING ELSE REMAINS THE SAME Economics for Leaders Assumption: EVERYTHING ELSE REMAINS THE SAME Economics for Leaders

Shifting Supply What besides price affects producers’ willingness to offer products for sale? Shifting Supply What besides price affects producers’ willingness to offer products for sale?

What If “Everything Else” DOESN’T Stay the Same? Supply of CDs AFTER Something has 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. Price Qa Qb Qt $7 3 2 5 $13 6 6 12 $20 9 8 17 $35 18 13 31 Economics for Leaders

Supply shifters costs of production resource availability changes technology changes policies change (taxes, for 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 WW 2 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 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 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 = 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 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.

Picture of CD Market St $20 Price $13 $7 Dt 0 Economics for Leaders Picture of CD Market St $20 Price $13 $7 Dt 0 Economics for Leaders 15 QD

Shifts and changing equilibrium S’ P S An deacrese in supply causes an increase 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 Economics for Leaders Q** Q* Q

Shifts and changing equilibrium P S An increase in demand causes an increase in 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 Economics for Leaders Q* Q** Q

1. Markets are dynamic. 2. Market prices aren’t set; they happen! http: //www. youtube. 1. Markets are dynamic. 2. Market prices aren’t set; they happen! http: //www. youtube. com/watch? v=Ng 3 XHPdex. NM Economics for Leaders

Effect of Competition St Stc $20 Price $13 $7 Dt 0 Economics for Leaders Effect of Competition St Stc $20 Price $13 $7 Dt 0 Economics for Leaders 15 QD 21

Sellers Compete with Other Sellers How do they compete? Economics for Leaders Sellers Compete with Other Sellers How do they compete? Economics for Leaders

Buyers Compete with Other Buyers How do they compete? Economics for Leaders Buyers Compete with Other Buyers How do they compete? Economics for Leaders

Market Competition: Win-Win Outcomes Both buyers and sellers value what they received more than 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 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 wellfunctioning markets: Property rights Economics for Leaders Rule of law Institutions necessary for wellfunctioning markets: Property rights Economics for Leaders Rule of law

Open Markets Benefit the Poor 1. They make more goods and services available at Open Markets Benefit the Poor 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. Economics for Leaders

The “Big Ideas” from Lesson 3: 1. 2. 3. 4. 5. Open markets benefit The “Big Ideas” from Lesson 3: 1. 2. 3. 4. 5. 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