4.7 Markets

1
4.7 Markets
4.7.1 Market Forces 4.7.2 Shifts in
Demand 4.7.3 Shifts in Supply 4.7.4 Some
Examples 4.7.5 Summary
2
Application
Growers scalded by the weak price of tea Alan
Hamilton, The Times, 25th July 2007

• UK consumers paying far less for tea than we did
  30 years ago
• Price is less than 1p a cup and the real price is
  a quarter of what it was in 1977
• Production stands at 3.5 million tonnes from 36
  countries
• UK demand starting to rise at specialist end but
  static for standard tea global supply is 2 too
  great each year.

3
4.7.1 Market Forces
Market Demand - aggregation of individual demands
Market Supply - aggregation of all MC curves for
firms
P
S SMC
P1
Equilibrium
Pe
D Sd
Q
Qe
Qs
Qd
4
Consumer Surplus
S SMC
Pe
Producer Surplus
D Sd
Qe
5
4.7.2 Shifts in Supply
Left
Right
Change in input prices
Cost of technology
Government Intervention
Subsidies
Down
Up
Taxes
6
Supply Shift
S 1
S
P
P1
Pe
D
Qe
Q1
Q
Q
7
Subsidies and Taxes
S Tax
S
P
S Subsidy
Pt
Pe
Ps
D
Qs
Qe
Qt
Q
8
4.7.3 Shifts in Demand
Left
Right
Change in income
Change in price of substitutes
Change in price of complements
Change in income (inferior good)
9
Demand Shift
S
P
P1
Pe
D1
D
Qe
Q1
Q
Q
10
4.7.4 Some Examples
Market for Palladium
S
P
P1
Pe
D1
D
Q1
Q
Qe
11
Market for 1980s Music
P
S1
S2
P2
P1
D2
D1
Q1
Q2
Q
12
Market for Ivory
P
S2
S1
P2
P1
D
Q2
Q
Q1
13
4.7.5 Summary

• Markets allocate resources
• Consumer and producer surplus arises at
  equilibrium
• Demand and supply curves shift with a number of
  factors