Objectives:
- Demonstrate how prices can guide individual behavior and continually change incentives of buyers and sellers in markets
- Illustrate Adam Smith’s idea of “the invisible hand” and F.A. Hayek’s idea of “spontaneous order.”
- Discuss exchange, voluntary cooperation, and market efficiency
- Show how prices emerge and how an equilibrium is the result of certain market forces
- Discuss shortages, surpluses, and the effects of price controls
- Tie broader connections between markets and society
Reading For This Module:
From “Introducing Economics through a Collection of Free Articles by Economists”:
- Where do prices come from? by Russell Roberts
- Price Controls by Hugh Rockoff
Introduction:
Why do economists marvel at markets? What is the big deal? The laws of supply and demand seem pretty obvious…is there a deeper meaning of it all? In this module, you will learn more about how markets function and how they may be a bit more complex than at first pass. Markets and prices are kind of a big deal…we’ll see why.
Dr. Wentland Lecture: Personal Finance, Markets, Information and Incentives (Part 1) (21:59)
This video builds on the previous model of supply and demand, applying this model in a way that shows some of the deeper insights about markets, prices, information, and incentives.
Dr. Wentland Lecture: Personal Finance, Markets, Information and Incentives (Part 2) (25:24)
Dr. Wentland Lecture: Personal Finance, Markets, Information and Incentives (Part 3) (27:15)
What Do Prices “Know” That You Don’t? (video) (4:33)
If you want to do good for the world, Prof. Michael Munger has a piece of advice: Listen to the price system. He compares prices to a genie that knows everything in the world and tell you exactly what goods and services humanity needs most. (-video description)
Marginal University Supplemental Lectures:
A Deeper Look at the Demand Curve (~7:46)
This short lecture has some additional insights about how to think about the demand curve and different ways of interpreting it.
Market Equilibrium Review (~5:34)
This short lecture reviews many of the points brought up in Dr. Wentland’s lecture, coming at it from a slightly different angle. This will be useful to help you review for the quizzes and exam.
Is supply and demand a realistic model? (~8:00)
This short lecture discusses some of the evidence about these market “theories”. Is the real world evidence consistent with supply and demand?
Prices as Information – The Example of the Rose (~2:30)
This short lecture illustrates some of the points from Dr. Wentland’s lecture about prices providing information and coordinating buyers and sellers. This is a must see (one of Dr. Wentland’s favorite short videos).
More on Prices as Signals (~4:46)
This short lecture continues some points from the previous lecture, but with wider applications.
Markets Link the World (seriously) (~3:36)
This video shows how markets and prices encourage global cooperation.
Reflection:
When prices go up and down, we don’t usually give it much thought. As we respond to price changes, we are part of a complex market process that connects the world in profound ways. We are all part of a larger order, one that emerges out of our simple, everyday actions participating in markets. Who knew markets were so interesting?