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Markets, Demand and Supply. Economic Systems n Classifying economic systems < methods of classification < classification by degree of government control.

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Presentation on theme: "Markets, Demand and Supply. Economic Systems n Classifying economic systems < methods of classification < classification by degree of government control."— Presentation transcript:

1 Markets, Demand and Supply

2 Economic Systems n Classifying economic systems < methods of classification < classification by degree of government control F command economies F free-market economies F mixed economies < other classifications F the informal economy F the not-for profit sector n Classifying economic systems < methods of classification < classification by degree of government control F command economies F free-market economies F mixed economies < other classifications F the informal economy F the not-for profit sector

3 Economic Systems n The command economy < features of a command economy < planning F consumption and investment F matching of inputs and outputs F distribution of output n Advantages of a command economy < high investment, high and stable growth < social goals pursued < low unemployment n The command economy < features of a command economy < planning F consumption and investment F matching of inputs and outputs F distribution of output n Advantages of a command economy < high investment, high and stable growth < social goals pursued < low unemployment

4 Economic Systems n Problems of a command economy < problems of gathering information < expensive to administer < inefficient allocation of resources F inappropriate incentives F no system of prices shortages and surpluses lack of response to consumer demand n Problems of a command economy < problems of gathering information < expensive to administer < inefficient allocation of resources F inappropriate incentives F no system of prices shortages and surpluses lack of response to consumer demand

5 Economic Systems n The free-market economy < based on free decision making by individuals and firms < demand and supply decisions < the price mechanism F shortages and surpluses shortage  price rises surplus  price falls F equilibrium price where demand equals supply F response to change in demand and supply n The free-market economy < based on free decision making by individuals and firms < demand and supply decisions < the price mechanism F shortages and surpluses shortage  price rises surplus  price falls F equilibrium price where demand equals supply F response to change in demand and supply

6 Economic Systems n Interdependence of markets < effect of a rise in demand F effect in market for that good n Interdependence of markets < effect of a rise in demand F effect in market for that good

7 Goods Market DgDg  shortage (D g > S g ) PgPg  SgSg  DgDg  until D g = S g The price mechanism: the effect of a rise in demand The price mechanism: the effect of a rise in demand

8 Economic Systems n Interdependence of markets < effect of a rise in demand F effect in market for that good F effect in factor markets n Interdependence of markets < effect of a rise in demand F effect in market for that good F effect in factor markets

9 Goods Market DgDg  shortage (D g > S g ) PgPg  SgSg  DgDg  until D g = S g Factor Market SgSg  SfSf  DfDf  until D f = S f  DfDf shortage (D f > S f ) PfPf  The price mechanism: the effect of a rise in demand The price mechanism: the effect of a rise in demand

10 Economic Systems n Interdependence of markets < effect of a rise in demand F effect in market for that good F effect in factor markets F effect in other goods markets n Interdependence of markets < effect of a rise in demand F effect in market for that good F effect in factor markets F effect in other goods markets

11 Economic Systems n Interdependence of markets < effect of a rise in demand F effect in market for that good F effect in factor markets F effect in other goods markets F effect in other factor markets n Interdependence of markets < effect of a rise in demand F effect in market for that good F effect in factor markets F effect in other goods markets F effect in other factor markets

12 Economic Systems n Interdependence of markets < effect of a rise in demand F effect in market for that good F effect in factor markets F effect in other goods markets F effect in other factor markets n Competitive markets n Interdependence of markets < effect of a rise in demand F effect in market for that good F effect in factor markets F effect in other goods markets F effect in other factor markets n Competitive markets

13 Economic Systems n Interdependence of markets < effect of a rise in demand F effect in market for that good F effect in factor markets F effect in other goods markets F effect in other factor markets n Competitive markets < perfectly competitive markets n Interdependence of markets < effect of a rise in demand F effect in market for that good F effect in factor markets F effect in other goods markets F effect in other factor markets n Competitive markets < perfectly competitive markets

14 Economic Systems n Interdependence of markets < effect of a rise in demand F effect in market for that good F effect in factor markets F effect in other goods markets F effect in other factor markets n Competitive markets < perfectly competitive markets < everyone is a price taker n Interdependence of markets < effect of a rise in demand F effect in market for that good F effect in factor markets F effect in other goods markets F effect in other factor markets n Competitive markets < perfectly competitive markets < everyone is a price taker

15 Economic Systems n Interdependence of markets < effect of a rise in demand F effect in market for that good F effect in factor markets F effect in other goods markets F effect in other factor markets n Competitive markets < perfectly competitive markets < everyone is a price taker < why study perfect markets? n Interdependence of markets < effect of a rise in demand F effect in market for that good F effect in factor markets F effect in other goods markets F effect in other factor markets n Competitive markets < perfectly competitive markets < everyone is a price taker < why study perfect markets?

16 Demand n The relationship between demand and price < the income effect < the substitution effect n The demand curve < assumptions < the axes < illustrates how much would be demanded at each price n The relationship between demand and price < the income effect < the substitution effect n The demand curve < assumptions < the axes < illustrates how much would be demanded at each price

17 Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) 20 Market demand (tonnes 000s) 700 A Point A Market demand for potatoes (monthly) Demand

18 Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) 20 40 Market demand (tonnes 000s) 700 500 ABAB Point A B Demand Market demand for potatoes (monthly)

19 Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) 20 40 60 Market demand (tonnes 000s) 700 500 350 ABCABC Point A B C Demand Market demand for potatoes (monthly)

20 Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) 20 40 60 80 Market demand (tonnes 000s) 700 500 350 200 ABCDABCD Point A B C D Demand Market demand for potatoes (monthly)

21 Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) 20 40 60 80 100 Market demand (tonnes 000s) 700 500 350 200 100 ABCDEABCDE Point A B C D E Demand Market demand for potatoes (monthly)

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

23 D1D1 Price P OQ0Q0 Q1Q1 Quantity An increase in demand D0D0

24 Supply n Relationship between supply and price < as price rises, firms supply more F it is worth incurring the extra unit costs F they switch from less profitable goods F in the long run, new firms will be encouraged to enter the market n The supply curve < assumptions < the axes < illustrates how much would be supplied at each price n Relationship between supply and price < as price rises, firms supply more F it is worth incurring the extra unit costs F they switch from less profitable goods F in the long run, new firms will be encouraged to enter the market n The supply curve < assumptions < the axes < illustrates how much would be supplied at each price

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

26 Price (pence per kg) Quantity (tonnes: 000s) Supply a b P 20 40 Q 100 200 abab Market supply of potatoes (monthly)

27 Price (pence per kg) Quantity (tonnes: 000s) Supply a b c P 20 40 60 Q 100 200 350 abcabc Market supply of potatoes (monthly)

28 Price (pence per kg) Quantity (tonnes: 000s) Supply a b c d P 20 40 60 80 Q 100 200 350 530 abcdabcd Market supply of potatoes (monthly)

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

30 Supply n 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 n Movements along and shifts in the supply curve n 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 n Movements along and shifts in the supply curve

31 P QO S0S0 Increase Shifts in the supply curve S1S1

32 P QO S2S2 S0S0 S1S1 IncreaseDecrease Shifts in the supply curve

33 The Determination of Price n Equilibrium price and output < response to shortages and surpluses < significance of “equilibrium” n Demand and supply curves n Equilibrium price and output < response to shortages and surpluses < significance of “equilibrium” n Demand and supply curves

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

35 The Determination of Price n Equilibrium price and output < response to shortages and surpluses < significance of “equilibrium” n Demand and supply curves < effect of price being above equilibrium n Equilibrium price and output < response to shortages and surpluses < significance of “equilibrium” n Demand and supply curves < effect of price being above equilibrium

36 The Determination of Price n Equilibrium price and output < response to shortages and surpluses < significance of “equilibrium” n Demand and supply curves < effect of price being above equilibrium F surplus  price falls n Equilibrium price and output < response to shortages and surpluses < significance of “equilibrium” n Demand and supply curves < effect of price being above equilibrium F surplus  price falls

37 Quantity (tonnes: 000s) E C B A a b c e Supply Demand Price (pence per kg) D d SURPLUS (330 000) The determination of market equilibrium (potatoes: monthly)

38 The Determination of Price n Equilibrium price and output < response to shortages and surpluses < significance of “equilibrium” n Demand and supply curves < effect of price being above equilibrium F surplus  price falls < effect of price being below equilibrium n Equilibrium price and output < response to shortages and surpluses < significance of “equilibrium” n Demand and supply curves < effect of price being above equilibrium F surplus  price falls < effect of price being below equilibrium

39 The Determination of Price n Equilibrium price and output < response to shortages and surpluses < significance of “equilibrium” n Demand and supply curves < effect of price being above equilibrium F surplus  price falls < effect of price being below equilibrium F shortage  price rises n Equilibrium price and output < response to shortages and surpluses < significance of “equilibrium” n Demand and supply curves < effect of price being above equilibrium F surplus  price falls < effect of price being below equilibrium F shortage  price rises

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

41 Quantity (tonnes: 000s) E D C B A a b c d e Supply Demand Price (pence per kg) SHORTAGE (300 000) The determination of market equilibrium (potatoes: monthly)

42 The Determination of Price n Equilibrium price and output < response to shortages and surpluses < significance of “equilibrium” n Demand and supply curves < effect of price being above equilibrium F surplus  price falls < effect of price being below equilibrium F shortage  price rises < equilibrium: where D = S n Equilibrium price and output < response to shortages and surpluses < significance of “equilibrium” n Demand and supply curves < effect of price being above equilibrium F surplus  price falls < effect of price being below equilibrium F shortage  price rises < equilibrium: where D = S

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

44 The Determination of Price n Effects of shifts in the demand curve < movement along S curve and new D curve F rise in demand (rightward shift)  P rises F fall in demand (leftward shift)  P falls n Effects of shifts in the demand curve < movement along S curve and new D curve F rise in demand (rightward shift)  P rises F fall in demand (leftward shift)  P falls

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

46 P Q O Pe1Pe1 Qe1Qe1 S D1D1 g

47 P Q O Pe1Pe1 Qe1Qe1 S D1D1 D2D2 g

48 P Q O Pe1Pe1 Qe1Qe1 S g h D1D1 D2D2 Pe2Pe2 Qe2Qe2 i

49 The Determination of Price n Effects of shifts in the demand curve < movement along S curve and new D curve F rise in demand (rightward shift)  P rises F fall in demand (leftward shift)  P falls n Effects of shifts in the supply curve n Effects of shifts in the demand curve < movement along S curve and new D curve F rise in demand (rightward shift)  P rises F fall in demand (leftward shift)  P falls n Effects of shifts in the supply curve

50 The Determination of Price n Effects of shifts in the demand curve < movement along S curve and new D curve F rise in demand (rightward shift)  P rises F fall in demand (leftward shift)  P falls n Effects of shifts in the supply curve < movement along D curve and new S curve n Effects of shifts in the demand curve < movement along S curve and new D curve F rise in demand (rightward shift)  P rises F fall in demand (leftward shift)  P falls n Effects of shifts in the supply curve < movement along D curve and new S curve

51 The Determination of Price n Effects of shifts in the demand curve < movement along S curve and new D curve F rise in demand (rightward shift)  P rises F fall in demand (leftward shift)  P falls n Effects of shifts in the supply curve < movement along D curve and new S curve F rise in supply (rightward shift)  P falls n Effects of shifts in the demand curve < movement along S curve and new D curve F rise in demand (rightward shift)  P rises F fall in demand (leftward shift)  P falls n Effects of shifts in the supply curve < movement along D curve and new S curve F rise in supply (rightward shift)  P falls

52 The Determination of Price n Effects of shifts in the demand curve < movement along S curve and new D curve F rise in demand (rightward shift)  P rises F fall in demand (leftward shift)  P falls n Effects of shifts in the supply curve < movement along D curve and new S curve F rise in supply (rightward shift)  P falls F fall in supply (leftward shift)  P rises n Effects of shifts in the demand curve < movement along S curve and new D curve F rise in demand (rightward shift)  P rises F fall in demand (leftward shift)  P falls n Effects of shifts in the supply curve < movement along D curve and new S curve F rise in supply (rightward shift)  P falls F fall in supply (leftward shift)  P rises

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

54 P Q O Pe1Pe1 Qe1Qe1 D S1S1 g

55 P Q O Pe1Pe1 Qe1Qe1 D S1S1 S2S2 g

56 P Q O Pe1Pe1 Pe3Pe3 Qe3Qe3 Qe1Qe1 D S1S1 S2S2 jg k

57 The Free-market Economy n 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 n 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

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


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