Markets, Demand and Supply Economic Systems s Classifying economic systems ( ( methods of classification classification by degree of government control 3 command economies economies 3 free-market 3 mixed economies ( other classifications 3 the 3 the informal economy not-for profit sector Economic Systems s The command economy features of a command economy ( planning ( 3 consumption 3 distribution and investment 3 matching of inputs and outputs of output s Advantages of a command economy high investment, high and stable growth ( social goals pursued ( ( low unemployment Economic Systems s Problems of a command economy ( ( ( problems of gathering information expensive to administer inefficient allocation of resources 3 inappropriate 3 no incentives system of prices • shortages and surpluses • lack of response to consumer demand Economic Systems s The free-market economy ( based on free decision making by individuals and firms demand and supply decisions the price mechanism 3 shortages ( ( and surpluses • shortage → price rises • surplus → price falls 3 equilibrium 3 response price • where demand equals supply to change in demand and supply Economic Systems s Interdependence of markets ( effect of a rise in demand 3 effect in market for that good The price mechanism: the effect of a rise in demand Goods Market Dg↑ shortage (Dg > Sg) Pg ↑ Sg ↑ Dg ↓ until Dg = Sg Economic Systems s Interdependence of markets ( effect of a rise in demand 3 effect in market for that good 3 effect in factor markets The price mechanism: the effect of a rise in demand Goods Market Dg↑ shortage (Dg > Sg) Pg ↑ Sg ↑ Dg ↓ until Dg = Sg Factor Market Sg ↑ Df ↑ shortage (Df > Sf) Pf ↑ Sf ↑ until Df = Sf Df ↓ Economic Systems s Interdependence of markets ( effect of a rise in demand 3 effect 3 effect 3 effect in market for that good in factor markets in other goods markets Economic Systems s Interdependence of markets ( effect of a rise in demand 3 effect 3 effect 3 effect 3 effect in market for that good in factor markets in other goods markets in other factor markets Economic Systems s Interdependence of markets ( effect of a rise in demand 3 effect 3 effect 3 effect 3 effect in market for that good in factor markets in other goods markets in other factor markets s Competitive markets Economic Systems s Interdependence of markets ( effect of a rise in demand 3 effect 3 effect 3 effect 3 effect in market for that good in factor markets in other goods markets in other factor markets s Competitive markets ( perfectly competitive markets Economic Systems s Interdependence of markets ( effect of a rise in demand 3 effect 3 effect 3 effect 3 effect in market for that good in factor markets in other goods markets in other factor markets s Competitive markets ( ( perfectly competitive markets everyone is a price taker Economic Systems s Interdependence of markets ( effect of a rise in demand 3 effect 3 effect 3 effect 3 effect in market for that good in factor markets in other goods markets in other factor markets s Competitive markets ( ( ( perfectly competitive markets everyone is a price taker why study perfect markets? Demand s The relationship between demand and price ( ( the income effect the substitution effect s The demand curve ( ( ( assumptions the axes illustrates how much would be demanded at each price Market demand for potatoes (monthly) 100 Price (pence per kg) Point Price Market demand (pence per kg) (tonnes 000s) A 20 700 80 60 40 A Demand 20 Quantity (tonnes: 000s) Market demand for potatoes (monthly) 100 Price (pence per kg) Point Price Market demand (pence per kg) (tonnes 000s) A B 20 40 700 500 80 60 B A 40 Demand 20 Quantity (tonnes: 000s) Market demand for potatoes (monthly) 100 Price (pence per kg) Point Price Market demand (pence per kg) (tonnes 000s) A B C C 20 40 60 700 500 350 80 60 B A 40 Demand 20 Quantity (tonnes: 000s) Market demand for potatoes (monthly) 100 Price (pence per kg) D Point Price Market demand (pence per kg) (tonnes 000s) A B C D 20 40 60 80 700 500 350 200 80 C 60 B A 40 Demand 20 Quantity (tonnes: 000s) Market demand for potatoes (monthly) E 100 Price (pence per kg) D Point Price Market demand (pence per kg) (tonnes 000s) A B C D E B A 20 40 60 80 100 700 500 350 200 100 80 C 60 40 Demand 20 Quantity (tonnes: 000s) Demand s Other determinants of demand ( ( ( ( ( ( tastes number and price of substitute goods number and price of complementary goods income distribution of income expectations s Movements along and shifts in the demand curve An increase in demand P Price D0 O Q0 Q1 Quantity D1 Supply s Relationship between supply and price ( as price rises, firms supply more 3 it is worth incurring the extra unit costs 3 they switch from less profitable goods 3 in the long run, new firms will be encouraged to enter the market s The supply curve assumptions ( the axes ( illustrates how much would be supplied at each price ( Market supply of potatoes (monthly) 100 Supply P Q Price (pence per kg) 80 a 20 100 60 40 a 20 Quantity (tonnes: 000s) Market supply of potatoes (monthly) 100 Supply P Q Price (pence per kg) 80 a b 20 100 40 200 60 b 40 a 20 Quantity (tonnes: 000s) Market supply of potatoes (monthly) 100 Supply P Q Price (pence per kg) 80 c a b c 20 100 40 200 60 350 60 b 40 a 20 Quantity (tonnes: 000s) Market supply of potatoes (monthly) 100 Supply d Price (pence per kg) P a b c d 20 40 60 80 Q 100 200 350 530 80 c 60 b 40 a 20 Quantity (tonnes: 000s) Market supply of potatoes (monthly) 100 d Price (pence per kg) e Supply P a 20 b 40 c 60 d 80 e 100 Q 100 200 350 530 700 80 c 60 b 40 a 20 Quantity (tonnes: 000s) Supply s 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 s Movements along and shifts in the supply curve Shifts in the supply curve P S0 S1 Increase O Q Shifts in the supply curve P S2 S0 S1 Decrease Increase O Q The Determination of Price s Equilibrium price and output ( ( response to shortages and surpluses significance of “equilibrium” s Demand and supply curves The determination of market equilibrium (potatoes: monthly) E e Supply D 100 d Cc Price (pence per kg) 80 60 b B 40 a a A A Demand 20 Quantity (tonnes: 000s) The Determination of Price s Equilibrium price and output ( ( response to shortages and surpluses significance of “equilibrium” effect of price being above equilibrium s Demand and supply curves ( The Determination of Price s Equilibrium price and output ( ( response to shortages and surpluses significance of “equilibrium” effect of price being above equilibrium 3 surplus s Demand and supply curves ( → price falls The determination of market equilibrium (potatoes: monthly) E e Supply D SURPLUS (330 000) Cc 100 d Price (pence per kg) 80 60 b B 40 a A Demand 20 Quantity (tonnes: 000s) The Determination of Price s Equilibrium price and output ( ( response to shortages and surpluses significance of “equilibrium” effect of price being above equilibrium 3 surplus s Demand and supply curves ( → price falls ( effect of price being below equilibrium The Determination of Price s Equilibrium price and output ( ( response to shortages and surpluses significance of “equilibrium” effect of price being above equilibrium 3 surplus s Demand and supply curves ( → price falls → price rises ( effect of price being below equilibrium 3 shortage The determination of market equilibrium (potatoes: monthly) E e Supply D 100 d Cc Price (pence per kg) 80 60 b a B 40 A Demand 20 Quantity (tonnes: 000s) The determination of market equilibrium (potatoes: monthly) E e Supply D 100 d Cc Price (pence per kg) 80 60 b a SHORTAGE (300 000) B 40 A Demand 20 Quantity (tonnes: 000s) The Determination of Price s Equilibrium price and output ( ( response to shortages and surpluses significance of “equilibrium” effect of price being above equilibrium 3 surplus s Demand and supply curves ( → price falls → price rises ( effect of price being below equilibrium 3 shortage ( equilibrium: where D = S The determination of market equilibrium (potatoes: monthly) E e Supply D 100 d Price (pence per kg) 80 60 b B 40 a A Demand 20 Qe Quantity (tonnes: 000s) The Determination of Price s Effects of shifts in the demand curve ( movement along S curve and new D curve 3 rise 3 fall in demand (rightward shift) → P rises in demand (leftward shift) → P falls Effect of a shift in the demand curve P S g Pe1 D1 O Qe1 Q Effect of a shift in the demand curve P S g Pe1 D1 O Qe1 Q Effect of a shift in the demand curve P S g Pe1 D2 D1 O Qe1 Q Effect of a shift in the demand curve P S i Pe2 g Pe1 h D2 D1 O Qe1 Qe2 Q The Determination of Price s Effects of shifts in the demand curve ( movement along S curve and new D curve 3 rise 3 fall in demand (rightward shift) → P rises in demand (leftward shift) → P falls s Effects of shifts in the supply curve The Determination of Price s Effects of shifts in the demand curve ( movement along S curve and new D curve 3 rise 3 fall in demand (rightward shift) → P rises in demand (leftward shift) → P falls s Effects of shifts in the supply curve ( movement along D curve and new S curve The Determination of Price s Effects of shifts in the demand curve ( movement along S curve and new D curve 3 rise 3 fall in demand (rightward shift) → P rises in demand (leftward shift) → P falls s Effects of shifts in the supply curve ( movement along D curve and new S curve 3 rise in supply (rightward shift) → P falls The Determination of Price s Effects of shifts in the demand curve ( movement along S curve and new D curve 3 rise 3 fall in demand (rightward shift) → P rises in demand (leftward shift) → P falls s Effects of shifts in the supply curve ( movement along D curve and new S curve 3 rise 3 fall in supply (rightward shift) → P falls in supply (leftward shift) → P rises Effect of a shift in the supply curve P S1 g Pe1 D O Qe1 Q Effect of a shift in the supply curve P S1 g Pe1 D O Qe1 Q Effect of a shift in the supply curve P S2 S1 g Pe1 D O Qe1 Q Effect of a shift in the supply curve P S2 S1 k Pe3 j Pe1 g D O Qe3 Qe1 Q The Free-market Economy s 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 Economy s Problems of a free-market economy ( ( ( competition may be limited inequality environment and social goals may be ignored types of intervention 3 use s The mixed economy ( of taxes, subsidies and benefits and regulation provision by the government 3 legislation 3 direct