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Markets, Demand and Supply

This comprehensive overview of economic systems explores the classification of economies based on government control, including command, free-market, and mixed economies. Delving into the mechanisms of demand and supply, the text discusses how prices adjust in response to changes in market dynamics. It highlights the advantages and drawbacks of command economies and free markets, illustrating concepts like equilibrium price, interdependence of markets, and factors influencing demand. This analysis serves as a foundational understanding of how economies operate and respond to various stimuli.

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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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