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Markets, Demand and Supply

Markets, Demand and Supply. Economic Systems. 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.

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Markets, Demand and Supply

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  1. Markets, Demand and Supply

  2. Economic Systems • 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

  3. Economic Systems • 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

  4. Economic Systems • 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

  5. Economic Systems • 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

  6. Economic Systems • Interdependence of markets • effect of a rise in demand • effect in market for that good

  7. Sg ­ Dg shortage (Dg > Sg) Pg ­ ­ Dg ¯ The price mechanism: the effect of a rise in demand Goods Market until Dg = Sg

  8. Economic Systems • Interdependence of markets • effect of a rise in demand • effect in market for that good • effect in factor markets

  9. Sf ­ Sg Df shortage (Df > Sf) Pf ­ ­ ­ Df ¯ The price mechanism: the effect of a rise in demand Goods Market Sg ­ Dg shortage (Dg > Sg) Pg until Dg = Sg ­ ­ Dg ¯ Factor Market until Df = Sf

  10. Economic Systems • Interdependence of markets • effect of a rise in demand • effect in market for that good • effect in factor markets • effect in other goods markets

  11. Economic Systems • Interdependence of markets • effect of a rise in demand • effect in market for that good • effect in factor markets • effect in other goods markets • effect in other factor markets

  12. Economic Systems • Interdependence of markets • effect of a rise in demand • effect in market for that good • effect in factor markets • effect in other goods markets • effect in other factor markets • Competitive markets

  13. Economic Systems • Interdependence of markets • effect of a rise in demand • effect in market for that good • effect in factor markets • effect in other goods markets • effect in other factor markets • Competitive markets • perfectly competitive markets

  14. Economic Systems • Interdependence of markets • effect of a rise in demand • effect in market for that good • effect in factor markets • effect in other goods markets • effect in other factor markets • Competitive markets • perfectly competitive markets • everyone is a price taker

  15. Economic Systems • Interdependence of markets • effect of a rise in demand • effect in market for that good • effect in factor markets • effect in other goods markets • effect in other factor markets • Competitive markets • perfectly competitive markets • everyone is a price taker • why study perfect markets?

  16. Demand • 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

  17. Market demand for potatoes (monthly) Market demand (tonnes 000s) 700 Point Price (pence per kg) 20 A Price (pence per kg) A Demand Quantity (tonnes: 000s)

  18. Market demand for potatoes (monthly) Market demand (tonnes 000s) 700 500 Point Price (pence per kg) 20 40 A B Price (pence per kg) B A Demand Quantity (tonnes: 000s)

  19. Market demand for potatoes (monthly) Market demand (tonnes 000s) 700 500 350 Point Price (pence per kg) 20 40 60 A B C C Price (pence per kg) B A Demand Quantity (tonnes: 000s)

  20. Market demand for potatoes (monthly) Market demand (tonnes 000s) 700 500 350 200 Point Price (pence per kg) 20 40 60 80 A B C D D C Price (pence per kg) B A Demand Quantity (tonnes: 000s)

  21. Market demand for potatoes (monthly) Market demand (tonnes 000s) 700 500 350 200 100 Point Price (pence per kg) 20 40 60 80 100 E A B C D E D C Price (pence per kg) B A Demand Quantity (tonnes: 000s)

  22. Demand • 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

  23. An increase in demand D1 P Price D0 O Q0 Q1 Quantity

  24. Supply • 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

  25. Market supply of potatoes (monthly) Supply P 20 Q 100 a Price (pence per kg) a Quantity (tonnes: 000s)

  26. Market supply of potatoes (monthly) Supply P 20 40 Q 100 200 a b Price (pence per kg) b a Quantity (tonnes: 000s)

  27. Market supply of potatoes (monthly) Supply P 20 40 60 Q 100 200 350 a b c c Price (pence per kg) b a Quantity (tonnes: 000s)

  28. Market supply of potatoes (monthly) Supply d P 20 40 60 80 Q 100 200 350 530 a b c d c Price (pence per kg) b a Quantity (tonnes: 000s)

  29. Market supply of potatoes (monthly) e Supply d P 20 40 60 80 100 Q 100 200 350 530 700 a b c d e c Price (pence per kg) b a Quantity (tonnes: 000s)

  30. Supply • 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

  31. S1 Shifts in the supply curve P S0 Increase O Q

  32. S2 Shifts in the supply curve P S0 S1 Decrease Increase O Q

  33. The Determination of Price • Equilibrium price and output • response to shortages and surpluses • significance of “equilibrium” • Demand and supply curves

  34. The determination of market equilibrium(potatoes: monthly) e E Supply d D c C Price (pence per kg) b B a A a A Demand Quantity (tonnes: 000s)

  35. The Determination of Price • Equilibrium price and output • response to shortages and surpluses • significance of “equilibrium” • Demand and supply curves • effect of price being above equilibrium

  36. The Determination of Price • 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

  37. d D SURPLUS (330 000) The determination of market equilibrium(potatoes: monthly) e E Supply c C Price (pence per kg) b B a A Demand Quantity (tonnes: 000s)

  38. The Determination of Price • 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 • effect of price being below equilibrium

  39. The Determination of Price • 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 • effect of price being below equilibrium • shortage  price rises

  40. b B The determination of market equilibrium(potatoes: monthly) e E Supply d D c C Price (pence per kg) a A Demand Quantity (tonnes: 000s)

  41. SHORTAGE (300 000) The determination of market equilibrium(potatoes: monthly) e E Supply d D c C Price (pence per kg) b B a A Demand Quantity (tonnes: 000s)

  42. The Determination of Price • 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 • effect of price being below equilibrium • shortage  price rises • equilibrium: where D = S

  43. The determination of market equilibrium(potatoes: monthly) e E Supply d D Price (pence per kg) b B a A Demand Qe Quantity (tonnes: 000s)

  44. The Determination of Price • 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

  45. Effect of a shift in the demand curve P S g Pe1 D1 O Qe1 Q

  46. Effect of a shift in the demand curve P S g Pe1 D1 O Qe1 Q

  47. Effect of a shift in the demand curve P S g Pe1 D2 D1 O Qe1 Q

  48. i h Effect of a shift in the demand curve P S Pe2 g Pe1 D2 D1 O Qe1 Qe2 Q

  49. The Determination of Price • 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 supply curve

  50. The Determination of Price • 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 supply curve • movement along D curve and new S curve

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