Economics for Leaders
Lesson 4: Markets In Action
Economics for Leaders
Joke Of The Day
A traveler wandering on an island inhabited entirely
by cannibals comes upon a butcher shop.
This shop specialized in human brains differentiated
according to source.
The sign in the shop read:
Artists' Brains $9/lb
Philosophers' Brains $12/lb
Scientists' Brains $15/lb
Economists' Brains $19/lb.
Economics for Leaders
Joke Of The Day
Upon reading the sign, the traveler noted,
My, those economists’ brains must be
popular!
To which the butcher replied,
Economics for Leaders
Joke Of The Day
Are you kidding?!
Do you have any idea how many
economists you have to kill to get
a pound of brains?
Economics for Leaders
Buyers
Equilibrium
Sellers
P
Qd
Qs
3.50
3.70
3.90
4.10
4.30
4.50
4.70
4.90
5.10
35
33
31
29
27
23
18
11
4
4
11
18
23
27
29
31
33
35
In The Chips
Qd
IN THE CHIPS: S & D
Qs
5.30
Price
5.10
4.90
4.70
4.50
4.30
4.10
3.90
3.70
3.50
3.30
0
4
Economics for Leaders
8
12
16
20
Quantity
24
28
32
36
Economics for Leaders
Buyers
Equilibrium
Sellers
Property rights, information, interaction and
competition.
Price squeezes to where Qs = Qd & market
clears.
This price facilitates all transactions that can
make both a buyer and a seller better off.
Economics for Leaders
Buyers
Equilibrium
Sellers
Goods go to consumers with the highest value.
Goods are produced by the sellers with the
lowest opportunity cost.
The well-being of society is maximized.
Profit is the Motivator!
Competition is the Regulator!
Economics for Leaders
Seasonal Variation: Apples
P
Apples
S1
P1
D1
Q1
Q
Seasonal Variation: Apples
Seasonal Variation: Beachfront Cottages
P
Beachfront Cottages
S1
P1
D1
Q1
Q
Seasonal Variation: Beachfront Cottages
Markets In Action
Each team starts with $3, answer three questions.
All three questions are worth $1.
If you answer the question correctly, you keep $.
If you answer incorrectly, you give up $.
Answers must be written and complete in time.
Decisions of the judges are final (honor system).
Each team must play every round.
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The First Three Questions
Cranberries, the
Ruby Slipper & Your Health
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1. What would you expect to happen if a new
machine called the Ruby Slipper is introduced
that dramatically improves the cranberry
harvesting process?
$1
A. The demand for cranberries would increase
because more cranberries will be produced.
B. The supply of cranberries will increase as the
marginal cost of production for farmers falls.
C. The quantity of cranberries purchased will
increase as the price falls.
D. Both A and B are correct.
E. Both B and C are correct.
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2. Suppose that newly released medical research
reveals significant health benefits associated with
increased cranberry consumption?
$1
A. The demand for cranberries will increase as
people seek the added health benefits of
cranberries.
B. The supply of cranberries will increase as more
people want to eat cranberries.
C. The quantity of cranberries produced will
increase as the price rises.
D. Both A and B are correct.
E. Both A and C are correct.
Economics for Leaders
1. What would you expect to happen if a new
machine called the Ruby Slipper is introduced
that dramatically improves the cranberry
harvesting process?
$1
A. The demand for cranberries would increase
because more cranberries will be produced.
B. The supply of cranberries will increase as the
marginal cost of production for farmers falls.
C. The quantity of cranberries purchased will
increase as the price falls.
D. Both A and B are correct.
E. Both B and C are correct.
Economics for Leaders
2. Suppose that newly released medical research
reveals significant health benefits associated with
increased cranberry consumption?
$1
A. The demand for cranberries will increase as
people seek the added health benefits of
cranberries.
B. The supply of cranberries will increase as more
people want to eat cranberries.
C. The quantity of cranberries produced will
increase as the price rises.
D. Both A and B are correct.
E. Both A and C are correct.
Economics for Leaders
The Final Question
When big (flat) screen TVs were first introduced
in the 1990s they were very expensive and
very few households owned one.
Over time there was increased competition
among producers as well as technological
advancements in the production process.
Over the same period average household
incomes also rose significantly.
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3. What effect would these changes have on the
supply and/or demand in the market for big (flat)
screen TVs?
$1
Consumers have
more income
Competition and
advancing
technology
among sellers
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3. What effect would these changes have on the
supply and/or demand in the market for big (flat)
screen TVs?
Consumers have
more income
Competition and
advancing technology
among sellers
↑ D:
↑ S:
P↑
Q↑
Q↑
Economics for Leaders
P↓
Q↑
for sure!
P↓
if
↑S>↑D
P↑
if
↑D>↑S
$1
P
Qd
Qs
3.50
3.70
3.90
4.10
4.30
4.50
4.70
4.90
5.10
35
33
31
29
27
23
18
11
4
4
11
18
23
27
29
31
33
35
More In The Chips
Qd
IN THE CHIPS: S & D
Qs
5.30
Price
5.10
4.90
4.70
4.50
4.30
4.10
3.90
3.70
3.50
3.30
0
4
Economics for Leaders
8
12
16
20
Quantity
24
28
32
36
More In The Chips
What would happen if we…
limit the price transactions take place
– Not above $3.80 (price ceiling)
– Not below $4.80 (price floor)
restricted # of sellers to 1 (same # buyers)
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Rent Control
Restrict rent below some level
Affordable housing for low income
How will buyers respond?
– Law of demand
How will sellers respond?
– Law of supply
Short run, Long run
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Minimum Wage
Restrict wage above some level
Living wage for low skill workers
How will buyers respond?
– Law of demand
How will sellers respond?
– Law of supply
Short run, Long run
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How do consumers respond to price changes for the
following goods/services?
salt, public transportation, gasoline, healthcare
What if you wanted to help poor people afford housing?
What if you wanted to help low skilled workers?
What if you wanted to reduce congestion on city streets?
What if you wanted less pollution?
Economics for Leaders
Big Ideas
Scarcity forces us to choose and every choice
has an opportunity cost.
Open markets are a key institution for
fostering economic growth and improving
standards of living.
Markets are characterized by property rights,
information, interaction and competition.
Economics for Leaders
Big Ideas
Prices reflect relative scarcity.
Prices represent opportunity cost.
Price is a powerful incentive.
Buyers’ and sellers’ decisions about quantity
demanded and quantity supplied are
influenced by changing opportunity costs.
The law of supply and the law of demand
describe producers’ and consumers’
predictable reactions to changes in price.
Economics for Leaders
Big Ideas
People do things that make them better off.
Voluntary trade increases well-being.
Markets do a good job of allocating scarce
resources to meet society’s many desires.
Government can sometimes help, be careful.
Economics for Leaders