1. Market mechanism DEMAND/SUPPLY

2. The Circular Flow of Economic Life Products Market Factors Market HouseholdsBusinesses Supply of L,L,C Payments for L, L, C Demand for L, L, C Payments of L, L, C Demand for products Payments for products Supply of products Payments for products

3. Demand Demand vs. Factors affecting Demand: - Average income - Population - Prices of related goods - Tastes - Particular factors Quantity demanded - Substitution effect - Income effect

4. fig Quantity Price D Demand

5. fig 2.2 D1D1 Price P OQ0Q0 Q1Q1 Quantity An increase in demand D0D0

6. Supply Supply vs. Quantity supplied Factors determining Supply: - Production costs - technology - input prices - Prices of production substitutes - Market organization - Particular factors

7. Price Quantity S Supply

8. fig P QO S2S2 S0S0 S1S1 IncreaseDecrease Shifts in the supply curve

9. The Market Equilibrium Shift in Demand - Rightward shift: shortage at the original price, prices are bid upward until supply and demand come back into balance Shift in Supply Leftward shift: At the original price arises shortage  the price starts to rise, raising quantity supplied and lowering quantity demanded -

10. fig Quantity C c Supply Demand Price D d SURPLUS Market disequilibrium Surplus

11. Dynamic cobweb Converging cobweb Diverging cobweb Persistent oscillations

12. Converging Cobweb

13. Tasks: 1. Explain and graphically depict, what will happen in the car market: a) launching robots has saved costs in car factories b) car prices has decreased c) prices of buses as a production substitute has risen d) increase in wages in car factories e) increase in average income of people

14. 2. Explain and graphically depict, what will happen in the market of a product X: a) consumer taste has changed in favour of a substitute of the product X b) production costs of the product X has increased c) production costs of the only substitute of commodity X has increased d) production costs of a perfect complement of the commodity X has dropped rapidly e) government has fully deregulated import tariffs for commodity X