Markets, Demand and Supply. Demand The relationship between demand and price the income effect the...

Markets, Demandand Supply

Markets, Demandand Supply

DemandDemand

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

The demand curve:The demand for potatoes (monthly)

The demand curve:The demand for potatoes (monthly)

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)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

D1

Pric

e

P

O Q0 Q1

Quantity

An increase in demandAn increase in demand

D0

Possible causes of a rise in demand• Tastes shift towards this product

• Rise in price of substitute goods

• Fall in price of complementary goods

• Rise in income

• Expectations of a rise in price

QQ Which way will the market demand for Which way will the market demand for petrol shift if the price of cars rises?petrol shift if the price of cars rises?

QQ Which way will the market demand for Which way will the market demand for petrol shift if the price of cars rises?petrol shift if the price of cars rises?

A. Right

B. Left

C. No shift (movement along the curve)

QQ Which way will the market demand Which way will the market demandfor petrol shift if petrolfor petrol shift if petrol

becomes more expensive?becomes more expensive?

QQ Which way will the market demand Which way will the market demandfor petrol shift if petrolfor petrol shift if petrol

becomes more expensive?becomes more expensive?

A. Right

B. Left


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 encouraged to enter the

market

The supply curve assumptions the axes illustrates how much would be supplied at each price

The supply curve:The supply of potatoes (monthly)

The supply curve:The 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

P

20

Q

100a

Market supply of potatoes (monthly)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

P

QO

S0

Increase

Shifts in the supply curveShifts in the supply curve

S1Possible causes of a rise in supply

• Fall in costs of production

• Reduced profitability of alternative products that could be supplied

• Increased profitability of goods in joint supply

• Benign shocks

• Expectations of a fall in price

P

QO

S2 S0 S1

IncreaseDecrease

Shifts in the supply curveShifts in the supply curve

QQ Which way will the market supply of Which way will the market supply of pizzas shift if the price of flour falls?pizzas shift if the price of flour falls?

QQ Which way will the market supply of Which way will the market supply of pizzas shift if the price of flour falls?pizzas shift if the price of flour falls?

A. Right

B. Left


The Determination of PriceThe Determination of Price

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 c

d

e

Supply

Demand

Pri

ce (

pen

ce p

er k

g)

Aa

Bb




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)







surplus price falls

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)







surplus price falls

effect of price being below equilibrium shortage price rises

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)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

Effect of a shift in the demand curveEffect of a shift in the demand curveP

QO

Pe1

Qe1

S

D1

g

Initial equilibrium at point g

P

QO

Pe1

Qe1

S

D1

g

Effect of a shift in the demand curveEffect 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


New equilibrium at point i


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

rise in supply (rightward shift) P falls

fall in supply (leftward shift) P rises

Effect of a shift in the supply curveEffect of a shift in the supply curveP

QO

Pe1

Qe1

D

S1

g Initial equilibrium at point g

P

QO

Pe1

Qe1

D

S1

g

Effect of a shift in the supply curveEffect 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


New equilibrium at point k

QQ The diagram shows The diagram shows the market for cocoa. the market for cocoa. Equilibrium is currently at Equilibrium is currently at point x. point x.

To which equilibrium To which equilibrium point (1, 2, 3, 4, 5, 6, 7 or point (1, 2, 3, 4, 5, 6, 7 or 8) will the market move if 8) will the market move if there isthere is a rise in the cost a rise in the cost of producing cocoaof producing cocoa??


To which equilibrium To which equilibrium point (1, 2, 3, 4, 5, 6, 7 or point (1, 2, 3, 4, 5, 6, 7 or 8) will the market move if 8) will the market move if there isthere is a rise in the cost a rise in the cost of producing cocoaof producing cocoa??

1. 2. 3. 4. 5. 6. 7. 8.


To which equilibrium To which equilibrium point (1, 2, 3, 4, 5, 6, 7 or point (1, 2, 3, 4, 5, 6, 7 or 8) will the market move if 8) will the market move if there isthere is a rise wages in a rise wages in the chocolate industrythe chocolate industry??


To which equilibrium To which equilibrium point (1, 2, 3, 4, 5, 6, 7 or point (1, 2, 3, 4, 5, 6, 7 or 8) will the market move if 8) will the market move if there isthere is a rise wages in a rise wages in the chocolate industrythe chocolate industry??

1. 2. 3. 4. 5. 6. 7. 8.

QQ The diagram shows the The diagram shows the market for cocoa. market for cocoa. Equilibrium is currently at Equilibrium is currently at point x.point x.

To which equilibrium point To which equilibrium point (1, 2, 3, 4, 5, 6, 7 or 8) will (1, 2, 3, 4, 5, 6, 7 or 8) will the market move if there isthe market move if there is speculation that the price speculation that the price of cocoa will fallof cocoa will fall??

QQ The diagram shows the The diagram shows the market for cocoa. market for cocoa. Equilibrium is currently at Equilibrium is currently at point x.point x.

To which equilibrium point To which equilibrium point (1, 2, 3, 4, 5, 6, 7 or 8) will (1, 2, 3, 4, 5, 6, 7 or 8) will the market move if there isthe market move if there is speculation that the price speculation that the price of cocoa will fallof cocoa will fall??

1. 2. 3. 4. 5. 6. 7. 8.

QQ The diagram shows the The diagram shows the market for cocoa. market for cocoa. Equilibrium is currently at Equilibrium is currently at point x. point x.

To which equilibrium point To which equilibrium point (1, 2, 3, 4, 5, 6, 7 or 8) will (1, 2, 3, 4, 5, 6, 7 or 8) will the market move if there isthe market move if there is increased demand for increased demand for chocolate and a new tax chocolate and a new tax on cocoaon cocoa??

QQ The diagram shows the The diagram shows the market for cocoa. market for cocoa. Equilibrium is currently at Equilibrium is currently at point x. point x.

To which equilibrium point To which equilibrium point (1, 2, 3, 4, 5, 6, 7 or 8) will (1, 2, 3, 4, 5, 6, 7 or 8) will the market move if there isthe market move if there is increased demand for increased demand for chocolate and a new tax chocolate and a new tax on cocoaon cocoa??

1. 2. 3. 4. 5. 6. 7. 8.

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

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

Behavioural EconomicsBehavioural Economics

What is behavioural economics?

Looks at the way people actually behave

individuals subject to impulses and seemingly irrational behaviour

people do not always learn from their mistakes

do assumptions of ‘rationality’ lead to errors in modelling and forecasting?

The growing interest in behavioural economics

important to understand the role of incentives


Explaining irrational behaviour understanding why people behave the way they do framing options effects of too much choice bounded rationality

problem of imperfect information use of past experience and rules of thumb understanding the different responses of different types of

people to the same set of circumstances


Explaining irrational behaviour (cont.)

relativity matters

people affected by the choices of others

herding and ‘groupthink’

fashion and trends

destabilising speculation

people influenced by sunk costs

Markets, Demand and Supply. Demand The relationship between demand and price the income effect the...

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