1. Markets, Demand and Supply. Economic Systems Classifying economic systems –methods of classification –classification by degree of government control

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

Documents

1. Markets, Demand and Supply. Economic Systems Classifying economic systems –methods of classification –classification by degree of government control