4.7 Markets

4.7.1 Market Forces4.7.2 Shifts in Demand4.7.3 Shifts in Supply4.7.4 Some Examples4.7.5 Summary

Application

“Growers scalded by the weak price of tea” Alan Hamilton, The Times, 25th July 2007

•UK consumers paying far less for tea than we did 30 years ago

•Price is less than 1p a cup and the real price is a quarter of what it was in 1977

•Production stands at 3.5 million tonnes from 36 countries

•UK demand starting to rise at specialist end but static for standard tea; global supply is 2% too great each year.

4.7.1 Market Forces

Market Demand - aggregation of individual demands

Market Supply - aggregation of all MC curves for firms

P

Q

S = MC

D = d

Pe

QeQd Qs

P1Equilibrium

S = MC

D = d

Pe

Qe

Consumer Surplus

Producer Surplus

4.7.2 Shifts in Supply

Change in input pricesLeft Right

Cost of technology

Government Intervention:

Subsidies

Taxes

Down

Up

Supply Shift

P

Q

S

D

S 1

P1

Pe

QeQ1Q’

Subsidies and Taxes

P

Q

S

D

S + Subsidy

S + Tax

PtPe

Ps

QsQeQt

4.7.3 Shifts in Demand

Change in incomeLeft Right

Change in price of substitutes

Change in price of complements

Change in income (inferior good)

Demand Shift

P

Q

S

Pe

Qe

DD1

P1

Q1 Q’

P

Q

S

Pe

Qe

D

D1

P1

Q1

Market for Palladium

4.7.4 Some Examples

P

Q

Market for 1980s Music

P1

Q1

S1 S2

D2D1

Q2

P2

P

Q

“Market” for Ivory

S2 S1

Q2

P2

P1

Q1

D

4.7.5 Summary

•Markets allocate resources

•Consumer and producer surplus arises at equilibrium

•Demand and supply curves shift with a number of factors