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The market mechanismThe market mechanism
OutlineOutline 1. Introduction1. Introduction
2. Markets versus planning2. Markets versus planning
3. Demand and supply3. Demand and supply
4. Movements & shifts in demand & supply4. Movements & shifts in demand & supply
1. Introduction1. Introduction What is economics about?What is economics about?
Scarce resources Scarce resources • Resources = factors of productionResources = factors of production
resources allocated automaticallyresources allocated automatically efficient allocation of resourcesefficient allocation of resources incentives - e.g. efficient firms make bigger incentives - e.g. efficient firms make bigger
‘‘The pursuit of private gain results in the The pursuit of private gain results in the social good’social good’
Mixed economiesMixed economies
Totallyplannedeconomy
Totallyfree-marketeconomy
Classifying economic systemsClassifying economic systems
Totallyplannedeconomy
Totallyfree-marketeconomy
N. KoreaCuba Poland France
UKUSA
Early 1980s
China HongKong
Classifying economic systemsClassifying economic systems
Totallyplannedeconomy
Totallyfree-marketeconomy
N. Korea
N. Korea
Cuba
China
Poland
Poland France
France UK
UKUSA
USA
Early 1980s
Early 2000s
China HongKong
CubaChina(HongKong)
Classifying economic systemsClassifying economic systems
3. The market - demand & supply 3. The market - demand & supply ExchangeExchange
markets - prices act as a signal markets - prices act as a signal Producer (supply)Producer (supply) Consumer (demand)Consumer (demand)
Competitive marketCompetitive market medium of exchangemedium of exchange competitioncompetition full informationfull information strong institutions & social customstrong institutions & social custom
3.1 Consumer demand3.1 Consumer demand
Determinants of consumer demand Determinants of consumer demand (a) price (a) price
• demand curve & demand functiondemand curve & demand function QQdd= a - bP= a - bP
• Movements along the demand curveMovements along the demand curve Price rise – move upPrice rise – move up Price fall – move downPrice fall – move down
figfig
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 Market demand for potatoes (monthly)(monthly)
Market demand for potatoes Market demand for potatoes (monthly)(monthly)
Demand
figfig
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
40
Market demand(tonnes 000s)
700
500
A
B
Point
A
B
Market demand for potatoes Market demand for potatoes (monthly)(monthly)
Market demand for potatoes Market demand for potatoes (monthly)(monthly)
Demand
figfig
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
40
60
Market demand(tonnes 000s)
700
500
350
A
B
C
Point
A
B
C
Market demand for potatoes Market demand for potatoes (monthly)(monthly)
Market demand for potatoes Market demand for potatoes (monthly)(monthly)
change in price of factor inputschange in price of factor inputs disasters - natural & humandisasters - natural & human strikes, regulation, organisation of the strikes, regulation, organisation of the