Market equilibrium  Outline 1. Demand and supply 1. Demand and supply 2. The interaction of demand & supply 2. The interaction of demand & supply equilibrium p, qequilibrium p, q 3. Movement to a new equilibrium 3. Movement to a new equilibrium 4. Impediments to the market mechanism 4. Impediments to the market mechanism

1. The market - demand & supply  Exchange markets - prices act as a signal markets - prices act as a signal Producer (supply) Producer (supply) Consumer (demand) Consumer (demand)  Competitive market medium of exchange medium of exchange competition competition full information full information strong institutions & social custom strong institutions & social custom

1.1 Consumer demand  Determinants of consumer demand (a) price (a) price demand curve & demand functiondemand curve & demand function Q d = a - bP Q d = a - bP Movements along the demand curveMovements along the demand curve Price rise – move up Price rise – move up Price fall – move down Price fall – move down

fig Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) Market demand (tonnes 000s) ABCDEABCDE Point A B C D E Market demand for potatoes (monthly) Demand

Consumer demand  Determinants of demand (shifts) (b) income - level & distribution (b) income - level & distribution (c) price of substitutes & complements (c) price of substitutes & complements (d) demography & age structure (d) demography & age structure (e) tastes & fashion - advertising (e) tastes & fashion - advertising (f) seasonal (f) seasonal (b)-(f) lead to shifts in the demand curve(b)-(f) lead to shifts in the demand curve

1.2 Supply  Determinants of supply price price supply curve and supply functionsupply curve and supply function technological innovation - product and/or process technological innovation - product and/or process change in price of factor inputs change in price of factor inputs disasters - natural & human disasters - natural & human strikes, regulation, organisation of the firm strikes, regulation, organisation of the firm

Supply  The supply curve & function Q s = a + bP Q s = a + bP Movements along the curve Movements along the curve Shifts in the supply curve Shifts in the supply curve

Price (pence per kg) Quantity (tonnes: 000s) Supply a P 20 Q 100 a Market supply of potatoes (monthly)

2. The interaction of demand & supply  Equilibrium price and quantity D = S i.e. market clearing D = S i.e. market clearing Excess demand (shortages) Excess demand (shortages) Excess supply (gluts) Excess supply (gluts)  Equilibrium - definition ‘a point of balance or a point of rest: a point to which there is a tendency to move.’ ‘a point of balance or a point of rest: a point to which there is a tendency to move.’

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

3. Movement to a new equilibrium  A) A shift in demand e.g. a rise in consumer income e.g. a rise in consumer income demand schedule shifts rightdemand schedule shifts right p and q risep and q rise e.g. a fall in the price of substitutes e.g. a fall in the price of substitutes demand schedule shifts leftdemand schedule shifts left p and q fallp and q fall

fig Effect of a shift in the demand curve P Q O Pe1Pe1 Qe1Qe1 S D1D1 g

3. Movement to a new equilibrium  B) A shift in supply e.g. costs of production rise e.g. wages rise e.g. costs of production rise e.g. wages rise supply curve shifts left supply curve shifts left p rises and q fallsp rises and q falls e.g. an improvement in technology e.g. an improvement in technology supply curve shifts right supply curve shifts right p falls and q risesp falls and q rises

fig Effect of a shift in the supply curve P Q O Pe1Pe1 Qe1Qe1 D S1S1 g

3. Movement to a new equilibrium  C) Simultaneous shift in demand and supply price of a complement falls e.g. CD players … AND price of a complement falls e.g. CD players … AND cost of producing CDs falls cost of producing CDs falls what would happen? what would happen?

4. Impediments to the operation of markets  Competitive markets  What if government intervenes? A) price ceiling (e.g. rents) - under- supply A) price ceiling (e.g. rents) - under- supply B) minimum wage - unemployment - excess supply B) minimum wage - unemployment - excess supply C) Taxes - e.g. pollution taxes - shift supply left C) Taxes - e.g. pollution taxes - shift supply left