PowerPoint to accompany Chapter 2 Markets, Demand and Supply
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?
Economic systems Types of economy classification by degree of government control command economies free-market economies mixed economies
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
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
Economic systems Competitive markets perfectly competitive markets everyone is a price taker why study perfect markets? Back to Learning Objectives
Demand and supply The demand curve
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
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 0.40 28 16 700 B 0.80 15 11 500 C 1.20 5 9 350 D 1.60 1 7 200 E 2.00 0 6 100 Sloman: Principles Of Economics 3e 2010 Pearson Australia
Price ($ per kg) Market demand for potatoes (Monthly) 2 Point Price ($ per kg) Market demand (tonnes 000s) 1.6 A 0.40 700 1.2 0.8 0.4 0 Demand 0 100 200 300 400 500 600 700 800 Quantity (tonnes: 000s) A
Price ($ per kg) Market demand for potatoes [Fig. 2.1] 2 1.6 1.2 E D C Point Price ($ per kg) Market demand (tonnes 000s) A 0.40 700 B 0.80 500 C 1.20 350 D 1.60 200 E 2.00 100 0.8 B 0.4 A Demand 0 0 100 200 300 400 500 600 700 800 Quantity (tonnes: 000s)
Demand and supply Shifts in demand
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
Price An increase in demand [Fig 2.2] P D 0 D 1 O Q 0 Q 1 Quantity
Price An decrease in demand P D 1 D 0 O Q 1 Q 0 Quantity Back to Learning Objectives
Demand and supply The supply curve
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
The Supply Curve: The Demand for Potatoes (Monthly) Price of potatoes ($ per kg) Farmer X's supply (tonnes) Total Market supply (tonnes: 000s) a 0.40 50 100 b 0.80 70 200 c 1.20 100 350 d 1.60 120 530 e 2.00 130 700 Sloman: Principles Of Economics 3e 2010 Pearson Australia
Price ($ per kg) 2 Market supply for potatoes (Monthly) Supply 1.6 1.2 a P 0.40 Q 100 0.8 0.4 a Quantity (tonnes: 000s) 0 0 100 200 300 400 500 600 700 800
Price ($ per kg) 2 1.6 1.2 0.8 0.4 Market supply for potatoes (Monthly) Supply d P Q c a 0.40 100 b 0.80 200 c 1.20 350 b d 1.60 530 e 2.00 700 a e Quantity (tonnes: 000s) 0 0 100 200 300 400 500 600 700 800
Demand and supply Shifts in supply
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
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
The determination of price Equilibrium price and output response to shortages and surpluses market clearing significance of equilibrium demand and supply curves
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) 0.40 700 (A) 100 (a) 0.80 500 (B) 200 (b) 1.20 350 (C) 350 (c) 1.60 200 (D) 530 (d) 2.00 100 (E) 700 (e) Sloman: Principles Of Economics 3e 2010 Pearson Australia
Price ($ per kg) 2.00 1.60 1.20 0.80 Determination of market equilibrium [Fig 2.5] a E D d C c b B 0.40 Demand Quantity (tonnes: 000s) 0 100 200 300 400 500 600 700 800 e Supply A
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
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
Determination of market equilibrium [Fig 2.5] Price ($ per kg) 2.00 E e 1.60 1.20 D SURPLUS (330 000) C c d Supply 0.80 b B 0.40 a A Demand Quantity (tonnes: 000s) 0 100 200 300 400 500 600 700 800
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
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
Price ($ per kg) 2.00 1.60 1.20 Determination of market equilibrium [Fig 2.5] E D d C c e Supply 0.80 0.40 a b B A Demand Quantity (tonnes: 000s) 0 100 200 300 400 500 600 700 800
Price ($ per kg) Determination of market equilibrium [Fig 2.5] 2.00 1.60 1.20 E d D c C e Supply 0.80 0.40 a b SHORTAGE (300 000) B A Demand Quantity (tonnes: 000s) 0 100 200 300 400 500 600 700 800
Demand and supply Market equilibrium
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
Price ($ per kg) Determination of market equilibrium [Fig 2.5] 2.00 1.60 E e D d Supply 1.20 0.80 b B 0.40 a A Demand Quantity (tonnes: 000s) Q e 0 100 200 300 400 500 600 700 800
Demand and supply Effect of a shift in the demand curve
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
Effect of a shift in the demand curve [Fig 2.6] P S P e1 g D 2 D 1 O Q e1 Q
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
Demand and supply Effect of a shift in the supply curve
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
P Effect of a shift in the supply curve [Fig 2.7] S 1 P e1 g D O Q e1 Q
P Effect of a shift in the supply curve [Fig 2.7] S 2 S 1 P e1 g D O Q e1 Q
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
Markets, demand and supply Economic systems
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
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