1' Markets, Demand and Supply

1
1. Markets, Demand and Supply
2
Economic Systems

• Classifying economic systems
• methods of classification
• classification by degree of government control
• command economies
• free-market economies
• mixed economies

3
Economic Systems

• The command economy
• features of a command economy
• planning
• consumption and investment
• matching of inputs and outputs
• distribution of output
• Advantages of a command economy
• high investment, high and stable growth
• social goals pursued
• low unemployment

4
Economic Systems

• Problems of a command economy
• problems of gathering information
• inefficient allocation of resources
• expensive to administer
• inappropriate incentives
• shortages and surpluses
• lack of response to consumer demand

5
Economic Systems

• The free-market economy
• based on free decision making by individuals and
  firms
• demand and supply decisions
• the price mechanism
• shortages and surpluses
• shortage ? price rises
• surplus ? price falls
• equilibrium price
• where demand equals supply
• response to change in demand and supply

6
Economic Systems

• Interdependence of markets
• effect of a rise in demand
• effect in market for that good

7
The price mechanism the effect of a rise in
demand
Goods Market
8
The price mechanism the effect of a rise in
demand
Goods Market
Dg

9
The price mechanism the effect of a rise in
demand
Goods Market
Dg
shortage (Dg gt Sg)

10
The price mechanism the effect of a rise in
demand
Goods Market
Dg
shortage (Dg gt Sg)
Pg


11
The price mechanism the effect of a rise in
demand
Goods Market
Sg

Dg
shortage (Dg gt Sg)
Pg


12
The price mechanism the effect of a rise in
demand
Goods Market
Sg

Dg
shortage (Dg gt Sg)
Pg


Dg

13
The price mechanism the effect of a rise in
demand
Goods Market
Sg

Dg
shortage (Dg gt Sg)
Pg


until Dg Sg
Dg

14
Economic Systems

• Interdependence of markets
• effect of a rise in demand
• effect in market for that good
• effect in factor markets

15
The price mechanism the effect of a rise in
demand
Goods Market
Sg

Dg
shortage (Dg gt Sg)
Pg


until Dg Sg
Dg

Factor Market
Sg

16
The price mechanism the effect of a rise in
demand
Goods Market
Sg

Dg
shortage (Dg gt Sg)
Pg


until Dg Sg
Dg

Factor Market
Sg
Df


17
The price mechanism the effect of a rise in
demand
Goods Market
Sg

Dg
shortage (Dg gt Sg)
Pg


until Dg Sg
Dg

Factor Market
Sg
shortage (Df gt Sf)
Df


18
The price mechanism the effect of a rise in
demand
Goods Market
Sg

Dg
shortage (Dg gt Sg)
Pg


until Dg Sg
Dg

Factor Market
Sg
shortage (Df gt Sf)
Pf
Df



19
The price mechanism the effect of a rise in
demand
Goods Market
Sg

Dg
shortage (Dg gt Sg)
Pg


until Dg Sg
Dg

Factor Market
Sf

Sg
shortage (Df gt Sf)
Pf
Df



20
The price mechanism the effect of a rise in
demand
Goods Market
Sg

Dg
shortage (Dg gt Sg)
Pg


until Dg Sg
Dg

Factor Market
Sf

Sg
shortage (Df gt Sf)
Pf
Df



Df

21
The price mechanism the effect of a rise in
demand
Goods Market
Sg

Dg
shortage (Dg gt Sg)
Pg


until Dg Sg
Dg

Factor Market
Sf

Sg
shortage (Df gt Sf)
Pf
Df



until Df Sf
Df

22
Economic Systems

• Interdependence of markets
• effect of a rise in demand
• effect in market for that good
• effect in factor markets
• effect in other goods markets

23
Economic Systems

• Interdependence of markets
• effect of a rise in demand
• effect in market for that good
• effect in factor markets
• effect in other goods markets
• effect in other factor markets

24
Economic Systems

• Interdependence of markets
• effect of a rise in demand
• effect in market for that good
• effect in factor markets
• effect in other goods markets
• effect in other factor markets
• Competitive markets

25
Economic Systems

• Interdependence of markets
• effect of a rise in demand
• effect in market for that good
• effect in factor markets
• effect in other goods markets
• effect in other factor markets
• Competitive markets
• perfectly competitive markets

26
Economic Systems

• Interdependence of markets
• effect of a rise in demand
• effect in market for that good
• effect in factor markets
• effect in other goods markets
• effect in other factor markets
• Competitive markets
• perfectly competitive markets
• everyone is a price taker

27
Economic Systems

• Interdependence of markets
• effect of a rise in demand
• effect in market for that good
• effect in factor markets
• effect in other goods markets
• effect in other factor markets
• Competitive markets
• perfectly competitive markets
• everyone is a price taker
• why study perfect markets?

28
Demand

• The relationship between demand and price
• the income effect
• the substitution effect
• The demand curve

29
Market demand for potatoes (monthly)
Market demand (tonnes 000s) 700
Price (pence per kg) 20
Point
A
Price (pence per kg)
A
Demand
Quantity (tonnes 000s)
30
Market demand for potatoes (monthly)
Market demand (tonnes 000s) 700 500
Price (pence per kg) 20 40
Point
A B
Price (pence per kg)
B
A
Demand
Quantity (tonnes 000s)
31
Market demand for potatoes (monthly)
Market demand (tonnes 000s) 700 500 350
Price (pence per kg) 20 40 60
Point
A B C
C
Price (pence per kg)
B
A
Demand
Quantity (tonnes 000s)
32
Market demand for potatoes (monthly)
Market demand (tonnes 000s) 700 500 350 200
Price (pence per kg) 20 40 60 80
Point
A B C D
D
C
Price (pence per kg)
B
A
Demand
Quantity (tonnes 000s)
33
Market demand for potatoes (monthly)
Market demand (tonnes 000s) 700 500 350 200 100
Price (pence per kg) 20 40 60 80 100
Point
E
A B C D E
D
C
Price (pence per kg)
B
A
Demand
Quantity (tonnes 000s)
34
Demand

• Other determinants of demand
• tastes
• number and price of substitute goods
• number and price of complementary goods
• income
• distribution of income
• expectations
• Movements along and shifts in the demand curve

35
An increase in demand
P
Price
D0
O
Q0
Q1
Quantity
36
Supply

• Relationship between supply and price
• as price rises, firms supply more
• it is worth incurring the extra unit costs
• they switch from less profitable goods
• in the long run, new firms will be encourage dot
  enter the market
• The supply curve

37
Market supply of potatoes (monthly)
Supply
P 20
Q 100
a
Price (pence per kg)
a
Quantity (tonnes 000s)
38
Market supply of potatoes (monthly)
Supply
P 20 40
Q 100 200
a b
Price (pence per kg)
b
a
Quantity (tonnes 000s)
39
Market supply of potatoes (monthly)
Supply
P 20 40 60
Q 100 200 350
a b c
c
Price (pence per kg)
b
a
Quantity (tonnes 000s)
40
Market supply of potatoes (monthly)
Supply
d
P 20 40 60 80
Q 100 200 350 530
a b c d
c
Price (pence per kg)
b
a
Quantity (tonnes 000s)
41
Market supply of potatoes (monthly)
e
Supply
d
P 20 40 60 80 100
Q 100 200 350 530 700
a b c d e
c
Price (pence per kg)
b
a
Quantity (tonnes 000s)
42
Supply

• Other determinants of supply
• costs of production
• profitability of alternative products
• profitability of goods in joint supply
• nature and other random shocks
• aims of producers
• expectations of producers
• Movements along and shifts in the supply curve

43
Shifts in the supply curve
P
S0
Q
O
44
Shifts in the supply curve
P
S0
Increase
Q
O
45
Shifts in the supply curve
P
S0
S1
Increase
Decrease
Q
O
46
The Determination of Price

• Equilibrium price and output
• response to shortages and surpluses
• significance of equilibrium
• Demand and supply curves

47
The determination of market equilibrium
(potatoes monthly)
E
e
Supply
d
D
c
C
Price (pence per kg)
b
B
a
A
Demand
Quantity (tonnes 000s)
48
The Determination of Price

• Equilibrium price and output
• response to shortages and surpluses
• significance of equilibrium
• Demand and supply curves
• effect of price being above equilibrium

49
The Determination of Price

• Equilibrium price and output
• response to shortages and surpluses
• significance of equilibrium
• Demand and supply curves
• effect of price being above equilibrium
• surplus ? price falls

50
The determination of market equilibrium
(potatoes monthly)
E
e
Supply
d
D
c
C
Price (pence per kg)
b
B
a
A
Demand
Quantity (tonnes 000s)
51
The Determination of Price

• Equilibrium price and output
• response to shortages and surpluses
• significance of equilibrium
• Demand and supply curves
• effect of price being above equilibrium
• surplus ? price falls
• effect of price being below equilibrium

52
The Determination of Price

• Equilibrium price and output
• response to shortages and surpluses
• significance of equilibrium
• Demand and supply curves
• effect of price being above equilibrium
• surplus ? price falls
• effect of price being below equilibrium
• shortage ? price rises

53
The determination of market equilibrium
(potatoes monthly)
E
e
Supply
d
D
c
C
Price (pence per kg)
b
B
a
A
Demand
Quantity (tonnes 000s)
54
The Determination of Price

• Equilibrium price and output
• response to shortages and surpluses
• significance of equilibrium
• Demand and supply curves
• effect of price being above equilibrium
• surplus ? price falls
• effect of price being below equilibrium
• shortage ? price rises
• equilibrium where D S

55
The determination of market equilibrium
(potatoes monthly)
E
e
Supply
d
D
Price (pence per kg)
b
B
a
A
Demand
Qe
Quantity (tonnes 000s)
56
The Determination of Price

• Effects of shifts in the demand curve
• movement along S curve and new D curve
• rise in demand (rightward shift) ? P rises
• fall in demand (leftward shift) ? P falls

57
Effect of a shift in the demand curve
P
S
g
Pe1
D1
O
Qe1
Q
58
Effect of a shift in the demand curve
P
S
g
Pe1
D1
O
Qe1
Q
59
Effect of a shift in the demand curve
P
S
g
Pe1
D2
D1
O
Qe1
Q
60
Effect of a shift in the demand curve
P
S
Pe2
g
Pe1
D2
D1
O
Qe1
Qe2
Q
61
The Determination of Price

• Effects of shifts in the demand curve
• movement along S curve and new D curve
• rise in demand (rightward shift) ? P rises
• fall in demand (leftward shift) ? P falls
• Effects of shifts in the supply curve

62
The Determination of Price

• Effects of shifts in the demand curve
• movement along S curve and new D curve
• rise in demand (rightward shift) ? P rises
• fall in demand (leftward shift) ? P falls
• Effects of shifts in the supply curve
• movement along D curve and new S curve

63
The Determination of Price

• Effects of shifts in the demand curve
• movement along S curve and new D curve
• rise in demand (rightward shift) ? P rises
• fall in demand (leftward shift) ? P falls
• Effects of shifts in the supply curve
• movement along D curve and new S curve
• rise in supply (rightward shift) ? P falls

64
The Determination of Price

• Effects of shifts in the demand curve
• movement along S curve and new D curve
• rise in demand (rightward shift) ? P rises
• fall in demand (leftward shift) ? P falls
• Effects of shifts in the supply curve
• movement along D curve and new S curve
• rise in supply (rightward shift) ? P falls
• fall in supply (leftward shift) ? P rises

65
Effect of a shift in the supply curve
P
S1
g
Pe1
D
O
Qe1
Q
66
Effect of a shift in the supply curve
P
S1
g
Pe1
D
O
Qe1
Q
67
Effect of a shift in the supply curve
P
S2
S1
g
Pe1
D
O
Qe1
Q
68
Effect of a shift in the supply curve
P
S2
S1
Pe3
g
Pe1
D
O
Qe3
Qe1
Q
69
The Free-market Economy

• Advantages of a free-market economy
• transmits information between buyers and sellers
• no need for costly bureaucracy
• incentives to be efficient
• competitive markets respond to consumer wishes

70
The Free-market Economy

• Problems of a free-market economy
• competition may be limited
• inequality
• environment and social goals may be ignored
• The mixed economy
• types of intervention
• use of taxes, subsidies and benefits
• legislation and regulation
• direct provision by the government