Markets, Demand and Supply

Markets,
Demand and
Supply
Economic Systems
I
Classifying economic systems
methods of classification
classification by degree of government

control
!
command economies
!
free-market economies
!
mixed economies
other classifications
!
the informal economy
!
the not-for profit sector
Economic Systems
I
The command economy
features of a command economy
planning
!
consumption and investment
!
matching of inputs and outputs
!
distribution of output
I
dvantages of a command economy
high investment, high and stable gro!th
social goals pursued
lo! unemployment
Economic Systems
I
"roblems of a command economy
problems of gathering information
expensive to administer
inefficient allocation of resources

!
inappropriate incentives
!
no system of prices
shortages and surpluses
lack of response to consumer demand
Economic Systems
I
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
!
e#uilibrium price
!here demand e#uals supply
!
response to change in demand and supply
Economic Systems
I
$nterdependence of markets
effect of a rise in demand

!
effect in market for that good
%oods Market
D
g

shortage
&D
g
> S
g
'
P
g

S
g

D
g
until D
g
= S
g
The price mechanism(
the effect of a rise in
demand
Economic Systems
I

!
!
effect in factor markets
%oods Market
D
g

shortage
&D
g
> S
g
'
P
g

S
g

D
g
until D
g
= S
g
)actor Market
S
g

S
f

D
f
until D
f
= S
f
D
f
shortage
&D
f
> S
f
'
P
f

The price mechanism(

the effect of a rise in
demand
Economic Systems
I

!
!
!
effect in other goods markets
Economic Systems
I

!
!
!
!
effect in other factor markets
Economic Systems
I

!
!
!
!
I
Competitive markets
Economic Systems
I

!
!
!
!
I
Competitive markets
perfectly competitive markets

Economic Systems
I

!
!
!
!
I
Competitive markets
everyone is a price taker

Economic Systems
I

!
!
!
!
I
Competitive markets
everyone is a price taker
!hy study perfect markets*

Demand
I
The relationship bet!een demand and
price
the income effect
the substitution effect

I
The demand curve
assumptions
the axes
illustrates ho! much !ould be demanded at

each price
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
"rice
(pence per kg)
+,
Market demand
(tonnes 000s)
-,,
"oint
Market demand for potatoes &monthly'

Demand
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
"rice
(pence per kg)
+,
.,
Market demand
(tonnes 000s)
-,,
/,,
0
"oint
0
Demand
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
"rice
(pence per kg)
+,
.,
1,
Market demand
(tonnes 000s)
-,,
/,,
2/,
0
C
"oint
0
C
Demand
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
"rice
(pence per kg)
+,
.,
1,
3,
Market demand
(tonnes 000s)
-,,
/,,
2/,
+,,
0
C
D
"oint
0
C
D
Demand
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
"rice
(pence per kg)
+,
.,
1,
3,
4,,
Market demand
(tonnes 000s)
-,,
/,,
2/,
+,,
4,,
0
C
D
E
"oint
0
C
D
E
Demand
Demand
I
5ther determinants of demand
tastes
number and price of substitute goods
number and price of complementary goods
income
distribution of income
expectations
I
Movements along and shifts in the
demand curve
D
4
P
r
i
c
e
P
O Q
0
Q
1
Quantity
n increase in demand
D
,
Supply
I
6elationship bet!een supply and price
as price rises, firms supply more

!
it is !orth incurring the extra unit costs
!
they s!itch from less profitable goods
!
in the long run, ne! firms !ill be encouraged to
enter the market
I
The supply curve
assumptions
the axes
illustrates ho! much !ould be supplied at

each price
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
Supply
a
P
+,
Q
4,,
a
Market supply of potatoes &monthly'
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
Supply
a
b
P
+,
.,
Q
4,,
+,,
a
b
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
Supply
a
b
c
P
+,
.,
1,
Q
4,,
+,,
2/,
a
b
c
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
Supply
a
b
c
d
P
+,
.,
1,
3,
Q
4,,
+,,
2/,
/2,
a
b
c
d
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
Supply
a
b
c
d
e
P
+,
.,
1,
3,
4,,
Q
4,,
+,,
2/,
/2,
-,,
a
b
c
d
e
Supply
I
5ther determinants of supply
costs of production
profitability of alternative products
profitability of goods in 7oint supply
nature and other random shocks
aims of producers
expectations of producers
I
Movements along and shifts in the
supply curve
P
Q O
S
0
Increase
Shifts in the supply curve
S
1
P
Q O
S
2
S
0 S
1
Increase Decrease
Shifts in the supply curve
The Determination of "rice
I
E#uilibrium price and output
response to shortages and surpluses
significance of 8e#uilibrium9
I
Demand and supply curves
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
The determination of market e#uilibrium
&potatoes( monthly'
!
"
#
a
c
$
e
%upp&y
!e'an$
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
#
a
( )
I
I
effect of price being above e#uilibrium

I
I

!
surplus price falls
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
"
(
#
a
)
c
e
%upp&y
!e'an$
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
D d S:6";:S
(330 000)
&potatoes( monthly'
I
I

!
surplus price falls
effect of price being belo! e#uilibrium

I
I

!
surplus price falls

!
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
!
"
#
a
c
$
e
%upp&y
!e'an$
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
0 b
&potatoes( monthly'
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
!
"
0
#
a
b
c
$
e
%upp&y
!e'an$
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
S<56T%E
(300 000)
&potatoes( monthly'
I
I

!
surplus price falls

!
e#uilibrium( !here D = S
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
! $
Q
e
(
#
a
)
e
%upp&y
!e'an$
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
&potatoes( monthly'
I
Effects of shifts in the demand curve
movement along S curve and ne! D curve

!
rise in demand &right!ard shift' " rises
!
fall in demand &left!ard shift' " falls
Effect of a shift in the demand curve
P
Q
O
P
e
1
Q
e
1
S
D
1
g
P
Q
O
P
e
1
Q
e
1
S
D
1
g
P
Q
O
P
e
1
Q
e
1
S
D
1
D
2
g
P
Q
O
P
e
1
Q
e
1
S
g
*
D
1
D
2
P
e
2
Q
e
2
i
I

!
!
I
Effects of shifts in the supply curve
I

!
!
I
movement along D curve and ne! S curve

I

!
!
I

!
rise in supply &right!ard shift' " falls
I

!
!
I

!
rise in supply &right!ard shift' " falls
!
fall in supply &left!ard shift' " rises
Effect of a shift in the supply curve
P
Q
O
P
e
1
Q
e
1
D
S
1
g
P
Q
O
P
e
1
Q
e
1
D
S
1
g
P
Q
O
P
e
1
Q
e
1
D
S
1
S
2
g
P
Q
O
P
e
1
P
e
3
Q
e
3
Q
e
1
D
S
1
S
2
+ g
k
The )ree-market Economy
I
dvantages of a free-market economy
transmits information bet!een buyers and

sellers
no need for costly bureaucracy
incentives to be efficient
competitive markets respond to consumer

!ishes
The )ree-market Economy
I
"roblems of a free-market economy
competition may be limited
ine#uality
environment and social goals may be

ignored
I
The mixed economy
types of intervention
!
use of taxes, subsidies and benefits
!
legislation and regulation
!
direct provision by the government

Markets, Demand and Supply

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Markets, Demand and Supply

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Markets,

classification by degree of government

features of a command economy

high investment, high and stable gro!th

social goals pursued

problems of gathering information

inefficient allocation of resources

based on free decision making by

demand and supply decisions

the price mechanism

effect of a rise in demand

effect of a rise in demand

The price mechanism(

effect of a rise in demand

effect of a rise in demand

effect of a rise in demand

effect of a rise in demand

perfectly competitive markets

effect of a rise in demand

perfectly competitive markets

everyone is a price taker

effect of a rise in demand

perfectly competitive markets

everyone is a price taker

!hy study perfect markets*

the income effect

the substitution effect

illustrates ho! much !ould be demanded at

Market demand for potatoes &monthly'

number and price of substitute goods

number and price of complementary goods

as price rises, firms supply more

illustrates ho! much !ould be supplied at

profitability of alternative products

profitability of goods in 7oint supply

nature and other random shocks

response to shortages and surpluses

response to shortages and surpluses

effect of price being above e#uilibrium

response to shortages and surpluses

effect of price being above e#uilibrium

response to shortages and surpluses

effect of price being above e#uilibrium

effect of price being belo! e#uilibrium

response to shortages and surpluses

effect of price being above e#uilibrium

effect of price being belo! e#uilibrium

response to shortages and surpluses

effect of price being above e#uilibrium

effect of price being belo! e#uilibrium

movement along S curve and ne! D curve

movement along S curve and ne! D curve

movement along S curve and ne! D curve

movement along D curve and ne! S curve

movement along S curve and ne! D curve

movement along D curve and ne! S curve

movement along S curve and ne! D curve

movement along D curve and ne! S curve

transmits information bet!een buyers and

no need for costly bureaucracy

competitive markets respond to consumer

competition may be limited

environment and social goals may be