1. Markets, Demand and Supply. Economic Systems Classifying economic systems –methods of...

1. Markets, Demand and Supply

Economic SystemsEconomic Systems

• Classifying economic systems

– methods of classification

– classification by degree of government control

• command economies

• free-market economies

• mixed economies

• Classifying economic systems

– methods of classification

– classification by degree of government control

• command economies

• free-market economies

• mixed economies


• The command economy– features of a command economy– planning

• consumption and investment• matching of inputs and outputs• distribution 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 investment• matching of inputs and outputs• distribution 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

– inefficient allocation of resources

– expensive to administer

– inappropriate incentives

– shortages and surpluses

– lack of response to consumer demand

• Problems of a command economy

– problems of gathering information

– inefficient allocation of resources

– expensive to administer

– inappropriate incentives

– 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



Goods Market

The price mechanism:the effect of a rise in demand


Goods Market

Dg



Goods Market

Dg shortage(Dg > Sg)



Goods Market


Pg



Goods Market


Pg Sg



Goods Market


Pg Sg

Dg



Goods Market


Pg Sg

Dguntil Dg = Sg






• effect in factor markets




Goods Market


Pg Sg

Dguntil Dg = Sg

Factor Market

Sg



Goods Market


Pg Sg

Dguntil Dg = Sg

Factor Market

Sg Df



Goods Market


Pg Sg

Dguntil Dg = Sg

Factor Market

Sg shortage(Df > Sf)

Df



Goods Market


Pg Sg

Dguntil Dg = Sg

Factor Market


Pf Df



Goods Market


Pg Sg

Dguntil Dg = Sg

Factor Market


Pf Sf

Df



Goods Market


Pg Sg

Dguntil Dg = Sg

Factor Market


Pf Sf

Df Df



Goods Market


Pg Sg

Dguntil Dg = Sg

Factor Market


Pf Sf

Df until Df = Sf

Df







• effect in other goods markets










• effect in other factor markets












• Competitive markets






• Competitive markets







• Competitive markets– perfectly competitive markets














– everyone is a price taker
















– why study perfect markets?








– why study perfect markets?

DemandDemand

• The relationship between demand and price– the income effect– the substitution effect

• The demand curve

• The relationship between demand and price– the income effect– the substitution effect

• The demand curve

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)

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 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 encourage dot enter the market

• The supply curve

• 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 encourage dot enter the market

• The supply curve

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)

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

Shifts in the supply curve

P

QO

S0

Increase

S1


P

QO

S2 S0 S1

IncreaseDecrease


The Determination of PriceThe Determination of Price

• Equilibrium price and output

– response to shortages and surpluses

– significance of “equilibrium”

• Demand and supply curves

• Equilibrium price and output

– response to shortages and surpluses

– significance of “equilibrium”

• 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

B

Aa

b

c

d

e

Supply

Demand

Pri

ce (

pen

ce p

er k

g)


• Equilibrium price and output– response to shortages and surpluses– significance of “equilibrium”

• Demand and supply curves– effect of price being above equilibrium






• 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)






– effect of price being below equilibrium




– effect of price being below equilibrium





– effect of price being below equilibrium• shortage price rises





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)







– equilibrium: where D = S





– 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)


• 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

• Effects of shifts in the demand curve

– movement along S curve and new D curve



Effect 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 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 demand curve– movement along S curve and new D curve



• Effects of shifts in the supply curve




• Effects of shifts in the supply curve





• 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 curveP

QO

Pe1

Qe1

D

S1

g

P

QO

Pe1

Qe1

D

S1

g

Effect 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 regulation

• direct 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 regulation

• direct provision by the government

1. Markets, Demand and Supply. Economic Systems Classifying economic systems –methods of...

Documents

Transcript of 1. Markets, Demand and Supply. Economic Systems Classifying economic systems –methods of...