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1 PowerPoint to accompany Chapter 2 Markets, Demand and Supply

2 Learning Objectives 2.1 Economic systems How do countries differ in the way their economies are organised? 2.2 Demand How much will people buy of any item? 2.3 The free market economy How well does it serves us? 2.4 The determination of price How much of any item will actually be bought and sold, and at what price? 2.5 The free market economy How well does it serves us?

3 Economic systems Types of economy classification by degree of government control command economies free-market economies mixed economies

4 Economic systems 1980s Totally planned economy N. Korea China Cuba Poland N. Korea Cuba China Australia Poland France UK USA Hong Kong France UK USA China Australia (Hong Kong) Totally free-market economy 2000s

5 Economic systems The free-market economy free decision making by individuals firms seek to maximise profits consumers seek value for money from purchases workers seek to maximise wages

6 Economic systems Competitive markets perfectly competitive markets everyone is a price taker why study perfect markets? Back to Learning Objectives

7 Demand and supply The demand curve

8 Demand The relationship between demand and price law of demand income effect substitution effect The demand curve assumptions the axes illustrates how much would be demanded at each price

9 The demand curve: The demand for potatoes (monthly) (1) (2) (3) (4) Tracey's Darren's demand demand (kg) (kg) Price ($ per kg) Total market demand (tonnes: 000s) A B C D E Sloman: Principles Of Economics 3e 2010 Pearson Australia

10 Price ($ per kg) Market demand for potatoes (Monthly) 2 Point Price ($ per kg) Market demand (tonnes 000s) 1.6 A Demand Quantity (tonnes: 000s) A

11 Price ($ per kg) Market demand for potatoes [Fig. 2.1] E D C Point Price ($ per kg) Market demand (tonnes 000s) A B C D E B 0.4 A Demand Quantity (tonnes: 000s)

12 Demand and supply Shifts in demand

13 Other determinants of demand tastes number and price of substitute goods number and price of complementary goods income distribution of income Demand expectations of future price changes Movements along and shifts in the demand curve

14 Price An increase in demand [Fig 2.2] P D 0 D 1 O Q 0 Q 1 Quantity

15 Price An decrease in demand P D 1 D 0 O Q 1 Q 0 Quantity Back to Learning Objectives

16 Demand and supply The supply curve

17 Supply and price Supply 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

18 The Supply Curve: The Demand for Potatoes (Monthly) Price of potatoes ($ per kg) Farmer X's supply (tonnes) Total Market supply (tonnes: 000s) a b c d e Sloman: Principles Of Economics 3e 2010 Pearson Australia

19 Price ($ per kg) 2 Market supply for potatoes (Monthly) Supply a P 0.40 Q a Quantity (tonnes: 000s)

20 Price ($ per kg) Market supply for potatoes (Monthly) Supply d P Q c a b c b d e a e Quantity (tonnes: 000s)

21 Demand and supply Shifts in supply

22 Supply Other determinants of supply change in costs of production profitability of alternative products profitability of goods in joint supply nature, random shocks and other unpredictable events aims of producers expectations of future price changes the number of suppliers Movements along and shifts in the supply curve

23 P Shifts in the supply curve [Fig 2.4] S 2 S 0 S 1 Decrease in supply Increase in supply O Back to Learning Objectives Q

24 The determination of price Equilibrium price and output response to shortages and surpluses market clearing significance of equilibrium demand and supply curves

25 Equilibrium price and output: Market demand and supply of potatoes (monthly) [Table 2.3] Price of Potatoes ($ per kilo) Total Market Demand (Tonnes: 000s) Total Market Supply (Tonnes: 000s) (A) 100 (a) (B) 200 (b) (C) 350 (c) (D) 530 (d) (E) 700 (e) Sloman: Principles Of Economics 3e 2010 Pearson Australia

26 Price ($ per kg) Determination of market equilibrium [Fig 2.5] a E D d C c b B 0.40 Demand Quantity (tonnes: 000s) e Supply A

27 The determination of price Equilibrium price and output response to shortages and surpluses market clearing significance of equilibrium demand and supply curves effect of price being above equilibrium

28 The determination of price Equilibrium price and output response to shortages and surpluses market clearing significance of equilibrium demand and supply curves effect of price being above equilibrium surplus price falls

29 Determination of market equilibrium [Fig 2.5] Price ($ per kg) 2.00 E e D SURPLUS ( ) C c d Supply 0.80 b B 0.40 a A Demand Quantity (tonnes: 000s)

30 The determination of price Equilibrium price and output response to shortages and surpluses market clearing significance of equilibrium demand and supply curves effect of price being above equilibrium surplus price falls effect of price being below equilibrium

31 The determination of price Equilibrium price and output response to shortages and surpluses market clearing 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

32 Price ($ per kg) Determination of market equilibrium [Fig 2.5] E D d C c e Supply a b B A Demand Quantity (tonnes: 000s)

33 Price ($ per kg) Determination of market equilibrium [Fig 2.5] E d D c C e Supply a b SHORTAGE ( ) B A Demand Quantity (tonnes: 000s)

34 Demand and supply Market equilibrium

35 The determination of price Equilibrium price and output response to shortages and surpluses market clearing 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

36 Price ($ per kg) Determination of market equilibrium [Fig 2.5] E e D d Supply b B 0.40 a A Demand Quantity (tonnes: 000s) Q e

37 Demand and supply Effect of a shift in the demand curve

38 The determination of price Movement to a new equilibrium 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

39 Effect of a shift in the demand curve [Fig 2.6] P S P e1 g D 2 D 1 O Q e1 Q

40 Effect of a shift in the demand curve [Fig 2.6] P S P e2 i P e1 g h D 2 D 1 O Q e1 Q e2 Q

41 Demand and supply Effect of a shift in the supply curve

42 The determination of price 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

43 P Effect of a shift in the supply curve [Fig 2.7] S 1 P e1 g D O Q e1 Q

44 P Effect of a shift in the supply curve [Fig 2.7] S 2 S 1 P e1 g D O Q e1 Q

45 P Effect of a shift in the supply curve [Fig 2.7] S 2 S 1 P e2 k P e1 j g O Back to Learning Objectives Q e3 Q e1 D Q

46 Markets, demand and supply Economic systems

47 The 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 Problems with a free-market economy competition may be limited inequality environment and social goals may be ignored

48 The free-market economy The mixed economy types of intervention use of taxes, subsidies and benefits legislation and regulation direct provision by the government Back to Learning Objectives

Contents. Consumer Choice: Individual and Market Demand- Demand and Elasticity. I) Markets and Prices. II) Demand Side. III) The Supply Side

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