Markets, Demand and Supply

Markets, Demand and

Supply

Markets, Demand and

Supply

Economic SystemsEconomic Systems

Classifying economic systems methods of classification

classification by degree of government controlcommand economies

free-market economies

mixed economies

other classifications the informal economy

the not-for profit sector

Classifying economic systems methods of classification

classification by degree of government controlcommand economies

free-market economies

mixed economies

other classifications the informal economy

the not-for profit sector


The command economy features of a command economy planning

consumption and investmentmatching of inputs and outputsdistribution of output

Advantages of a command economy high investment, high and stable growth social goals pursued low unemployment

The command economy features of a command economy planning

consumption and investmentmatching of inputs and outputsdistribution of output

Advantages of a command economy high investment, high and stable growth social goals pursued low unemployment


Problems 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

Problems 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


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

equilibrium price• where demand equals supply

response to change in demand and supply

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

equilibrium price• where demand equals supply

response to change in demand and supply


Interdependence of markets effect of a rise in demand

effect in market for that good


effect in market for that good

Goods Market

Dg shortage(Dg > Sg)

Pg Sg

Dguntil Dg = Sg

The price mechanism:the effect of a rise in demand




effect in market for that goodeffect in factor markets


effect in market for that goodeffect in factor markets

Goods Market

Dg shortage(Dg > Sg)

Pg Sg

Dguntil Dg = Sg

Factor Market

Sg Sf

Df until Df = Sf

Df shortage(Df > Sf)

Pf





effect in market for that goodeffect in factor marketseffect in other goods markets


effect in market for that goodeffect in factor marketseffect in other goods markets



effect in market for that goodeffect in factor marketseffect in other goods marketseffect in other factor markets






Competitive markets



Competitive markets




Competitive markets perfectly competitive markets



Competitive markets perfectly competitive markets




Competitive markets perfectly competitive markets everyone is a price taker



Competitive markets perfectly competitive markets everyone is a price taker




Competitive markets perfectly competitive markets everyone is a price taker why study perfect markets?



Competitive markets perfectly competitive markets everyone is a price taker why study perfect markets?

DemandDemand

The relationship between demand and price the income effect

the substitution effect

The demand curve assumptions

the axes

illustrates how much would be demanded at each price

The relationship between demand and price the income effect

the substitution effect

The demand curve assumptions

the axes

illustrates how much would be demanded at each price

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Quantity (tonnes: 000s)

Pri

ce (

pen

ce p

er k

g)

Price(pence per kg)

20

Market demand(tonnes 000s)

700A

Point

A

Market demand for potatoes (monthly)Market demand for potatoes (monthly)

Demand

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


Pri

ce (

pen

ce p

er k

g)

Price(pence per kg)

20

40


700

500

A

B

Point

A

B

Demand


0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


Pri

ce (

pen

ce p

er k

g)

Price(pence per kg)

20

40

60


700

500

350

A

B

C

Point

A

B

C

Demand


0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


Pri

ce (

pen

ce p

er k

g)

Price(pence per kg)

20

40

60

80


700

500

350

200

A

B

C

D

Point

A

B

C

D

Demand


0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


Pri

ce (

pen

ce p

er k

g)

Price(pence per kg)

20

40

60

80

100


700

500

350

200100

A

B

C

D

E

Point

A

B

C

D

E

Demand


DemandDemand

Other determinants of demand tastes

number and price of substitute goods

number and price of complementary goods

income

distribution of income

expectations

Movements along and shifts in the demand curve

Other determinants of demand tastes

number and price of substitute goods

number and price of complementary goods

income

distribution of income

expectations

Movements along and shifts in the demand curve

D1

Pric

e

P

O Q0 Q1

Quantity

An increase in demandAn increase in demand

D0

SupplySupply

Relationship between supply and price as price rises, firms supply more

it is worth incurring the extra unit costs they switch from less profitable goods in the long run, new firms will be encouraged to

enter the market

The supply curve assumptions the axes illustrates how much would be supplied at

each price

Relationship between supply and price as price rises, firms supply more

it is worth incurring the extra unit costs they switch from less profitable goods in the long run, new firms will be encouraged to

enter the market

The supply curve assumptions the axes illustrates how much would be supplied at

each price

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Pri

ce (

pen

ce p

er k

g)


Supply

a

P

20

Q

100a

Market supply of potatoes (monthly)Market supply of potatoes (monthly)

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Pri

ce (

pen

ce p

er k

g)


Supply

a

b

P

20 40

Q

100200

ab


0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Pri

ce (

pen

ce p

er k

g)


Supply

a

b

c

P

20 40 60

Q

100200350

abc


0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Pri

ce (

pen

ce p

er k

g)


Supply

a

b

c

d P

20 40 60 80

Q

100200350530

abcd


0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Pri

ce (

pen

ce p

er k

g)


Supply

a

b

c

d

e

P

20 40 60 80100

Q

100200350530700

abcde


SupplySupply

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

Movements along and shifts in the supply curve

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

Movements along and shifts in the supply curve

P

QO

S0

Increase

Shifts in the supply curveShifts in the supply curve

S1

P

QO

S2 S0 S1

IncreaseDecrease

Shifts in the supply curveShifts in the supply curve

The Determination of PriceThe Determination of Price

Equilibrium price and output response to shortages and surpluses

significance of “equilibrium”

Demand and supply curves



Demand and supply curves

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

The determination of market equilibrium (potatoes: monthly)



E

D

C

Aa

c

d

e

Supply

Demand

Pri

ce (

pen

ce p

er k

g)

Aa

Bb




Demand and supply curves effect of price being above equilibrium








surplus price falls




surplus price falls

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


E

C

B

Aa

b

c

e

Supply

Demand

Pri

ce (

pen

ce p

er k

g)

D dSURPLUS

(330 000)







surplus price falls

effect of price being below equilibrium




surplus price falls

effect of price being below equilibrium





surplus price falls

effect of price being below equilibriumshortage price rises




surplus price falls


0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


E

D

C

Aa

c

d

e

Supply

Demand

Pri

ce (

pen

ce p

er k

g)

Bb



0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


E

D

C

B

Aa

b

c

d

e

Supply

Demand

Pri

ce (

pen

ce p

er k

g)

SHORTAGE

(300 000)







surplus price falls


equilibrium: where D = S




surplus price falls


equilibrium: where D = S

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

D d

Qe


E

B

Aa

b

e

Supply

Demand

Pri

ce (

pen

ce p

er k

g)The determination of market equilibrium

(potatoes: monthly)The determination of market equilibrium

(potatoes: monthly)


Effects of shifts in the demand curve

movement along S curve and new D curve

rise in demand (rightward shift) P rises

fall in demand (leftward shift) P falls





Effect of a shift in the demand curveEffect of a shift in the demand curveP

QO

Pe1

Qe1

S

D1

g

P

QO

Pe1

Qe1

S

D1

g

Effect of a shift in the demand curveEffect of a shift in the demand curve

P

QO

Pe1

Qe1

S

D1

D2

g


P

QO

Pe1

Qe1

S

g h

D1

D2

Pe2

Qe2

i







Effects of shifts in the supply curve












movement along D curve and new S curve














rise in supply (rightward shift) P falls
















fall in supply (leftward shift) P rises








fall in supply (leftward shift) P rises

Effect of a shift in the supply curveEffect of a shift in the supply curveP

QO

Pe1

Qe1

D

S1

g

P

QO

Pe1

Qe1

D

S1

g

Effect of a shift in the supply curveEffect of a shift in the supply curve

P

QO

Pe1

Qe1

D

S1

S2

g


P

QO

Pe1

Pe3

Qe3Qe1

D

S1

S2

j g

k


The Free-market EconomyThe Free-market Economy

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

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

The Free-market EconomyThe Free-market Economy

Problems of a free-market economy competition may be limited inequality environment and social goals may be

ignored

The mixed economy types of intervention

use of taxes, subsidies and benefits legislation and regulationdirect provision by the government

Problems of a free-market economy competition may be limited inequality environment and social goals may be

ignored

The mixed economy types of intervention

use of taxes, subsidies and benefits legislation and regulationdirect provision by the government

Markets, Demand and Supply

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