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Economics Level 5 Economics Economic Principles Economic Principles Topic 2: Price Mechanism: Demand & Supply Economic Environment Economic Environment.

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Presentation on theme: "Economics Level 5 Economics Economic Principles Economic Principles Topic 2: Price Mechanism: Demand & Supply Economic Environment Economic Environment."— Presentation transcript:

1 Economics Level 5 Economics Economic Principles Economic Principles Topic 2: Price Mechanism: Demand & Supply Economic Environment Economic Environment

2 New Zealand is a modern market economy

3 New Zealand was a traditional economy 1250 to 1500 c.1250 to 1500 – traditional unsustainable economy of abundance Maori settlers arrived from Cook Islands lived in coastal areas as seal and moa hunters self-sufficient nomadic tribes (iwi) and sub-tribes (hapu) collective (ie joint, not private) property ownership resource allocation decisions made by councils of chiefs main source of protein food became extinct 1500 to 1815 c.1500 to 1815 – traditional sustainable economy of scarcity harvesting of kai-moana (eg fish), birds, kumara, fern barter exchange (utu) between tribes [ note textbook ch. 15] intense rivalry between tribes due to resource scarcity ref fig 2.1fig 2.1

4 transition to market economy – expansion of food supply: pigs and potatoes – trade: British, Europeans, Australians, Americans muskets (guns) desired on account of iwi-rivalry exported goods/services for consumer/capital goods – national sovereignty from 1840 Treaty of Waitangi between British crown and many Iwi – growing settler markets for Maori goods and services Maori market gardeners; eg Waiheke Island flour milling and coastal shipping international trade, especially through Sydney – conflict over property rights; especially re land

5 Understanding Markets: Prices and Quantities Prices in a competitive market are determined by that market as a whole Prices in a competitive market are determined by that market as a whole – pricesare determined by demand supply – prices of goods and services are determined by the interaction of many buyers' demand and many sellers' supply for those products. Prices determine the quantity demanded of a good and also its quantity supplied Prices determine the quantity demanded of a good and also its quantity supplied – quantities, unlike prices, are determined by individual buyers and individual sellers

6 Demand and Supply in graphical form Each represented as a straight line or curve Each represented as a straight line or curve Demand "Curve"Supply "Curve" Quantity (Q) is a function of price (P) Quantity (Q) is a function of price (P) – If early economists were better mathematicians, Q would be on the "y-axis" and P on the "x-axis" !! depends on Price – Quantity depends on Price (and other things) information – Price is the information that makes markets work D P Q S P Q

7 Demand We want goods and services (products) that give us happiness ("utility") We want goods and services (products) that give us happiness ("utility") We demand products that we want if we are prepared to pay a price for them We demand products that we want if we are prepared to pay a price for them a willingnessan ability to incur an opportunity cost – this means a willingness and an ability to give up something else; to incur an opportunity cost Demand is a set of quantities matched to different prices Demand is a set of quantities matched to different prices – individual – individual demand (principle of diminishing utility)principle of diminishing utility market – collective (ie market) demand curves sum of all individual demand curves (text Fig 3.5)Fig 3.5

8 Exercise Law of diminishing marginal utility each of us is willing to pay a higher price for the first item (ie unit) of something because that usually gives more happiness than subsequent items Henry gets $6 worth of utility from eating 3 chocolate bars. He gets $6.50 worth of utility from 4 chocolate bars. What is Henrys marginal utility from the consumption of the 4th chocolate bar? If the price of is 55 cents per bar, how many will Henry buy?

9 Quantity Demanded versus (vs.) Demand a rise in the price of a good generates a left movement along the market demand curve for that product this is a decrease in quantity demanded ( fig) –t–this is not a decrease in demand –o–our desire for something, and our willingness to give up something for it, is not affected by its actual price Quantity demanded is one point on the demand curve –D–Demand is the w ww whole curve.

10 exercise on the difference between demand and quantity demanded In Carinthia and California, the people have a similar standard of living and they like apples to an equal extent. In Carinthia and California, the people have a similar standard of living and they like apples to an equal extent. – Therefore there is no difference in the demand for apples in Carinthia and California. In Carinthia the price of apples is high, whereas in California, the price is low. In Carinthia the price of apples is high, whereas in California, the price is low. – In which place are more apples demanded? – California fig

11 P Carinthia P California Carinthia California Demand for Apples (average per person) Difference in price only ie no demand shift. Q Q

12 Law of Market Demand Individuals buy less of a product the higher its price, ceteris paribus what is true for each consumer is true for all consumers combined the higher the price of a good the lower the quantity demanded the higher the price of a good the lower the quantity demanded –––––––––––– Demand is all the different quantities of a good or service that people would buy at different prices. Demand is all the different quantities of a good or service that people would buy at different prices.

13 ShiftsShifts of Demand Curve (eg Increased Demand) Shifts causes of increases in quantity demanded for a good, other than a change in its price causes of increases in quantity demanded for a good, other than a change in its price – increased aggregate (ie total) income (Y) causes an increase in demand for most goods/services – increased population causes an increase in demand for some goods/services – increased consumer preference for something may be influenced by information, advertising, climate – expectations of a future price increase – changing prices of related products increased price of a substitute productsubstitute decreased price of a complementary productcomplementary Bacon and Eggs?

14 D P Q D' Increased Demand say "D prime"

15 previous next continue with Q6 and Q7 Giffen Goods Giffen Goods

16 previous next 1.Which (of peas or beans) experiences a change of demand ? 2.Which experiences a change in quantity demanded only?

17 Supply: Production and Distribution firms each produce goods and services that give them revenue firms (companies, businesses) each produce goods and services that give them revenue – revenue gives them profits firms hire resources (factor inputs, eg labour) and buy material inputs (eg raw materials) firms hire resources (factor inputs, eg labour) and buy material inputs (eg raw materials) – inputs are transformed (eg manufactured) into outputs – this is the 'supply chain' distribution is the chain of services that bring goods/services to consumers distribution is the chain of services that bring goods/services to consumers – eg transport, finance, retail, communication

18 Supply Curve Firms have individual supply schedules. Firms have individual supply schedules. (3.11)3.11 Market supply schedules (& curves) are the sum of individual firms' supply schedules. Market supply schedules (& curves) are the sum of individual firms' supply schedules. The quantity supplied (Qs) (ie produced for sale) of a particular product is a function of the price of that product. The quantity supplied (Qs) (ie produced for sale) of a particular product is a function of the price of that product. – represented as a single position on a supply curve – an increase in price signals an increase in Qs (3.12)3.12 – quite different to an increase in supply (fig 3.12b)fig3.12b an increase in supply is a shift right of a supply curve a shift right; not a shift up !!

19 S P Q S' Increased Supply say "S prime"

20 Law of Market Supply ceteris paribus, the higher the price of a good the higher the quantity supplied ceteris paribus, the higher the price of a good the higher the quantity supplied –––––––––––– Supply is all the different quantities of a good or service that firms would produce for sale at different prices. Supply is all the different quantities of a good or service that firms would produce for sale at different prices.

21 ShiftsShifts of Supply Curve (eg Increased Supply) Shifts of Supply Curve (eg Increased Supply fig 3.12 ) Shifts causes of increases in quantity supplied for a good, other than a change in its price causes of increases in quantity supplied for a good, other than a change in its price – increased productivity for example, more eggs per hen (female chicken) may arise from improved technology or better climate – decreased costs for example, lower price of hens' food could be reduced wages – changes in prices of related goods for example, a fall in the price of chicken meat – increased expectation of future price increases supply less today – in the long run, higher profits mean more firms use Eggs as example

22 Price Determination: Market Equilibrium Markets clear when Q D equals Q S. Markets clear when Q D equals Q S. – no unsold goods – no shortages Q e – equilibrium quantity Q e Equilibrium Price Equilibrium Price (text 3.13)3.13 – the price for which markets clear plans of buyers and sellers balance – at this price there is not excess supply (Q S > Q D ) (Q S is not greater than Q D ) excess demand (Q D > Q S ) (Q D is not greater than Q S ) Adjustment to Equilibrium Adjustment to Equilibrium (text 3.14)3.14

23 3 P Q QSQS QDQD Correction of a Shortage P0P0 P1P1

24 previous next please continue with next 3 questions

25 previous next financial assets are subject to market forces (supply and demand) too

26 Changes to Equilibrium Prices: Shifting Curves A shift represents a 'disturbance' or 'shock' to a market in (or adjusting to) equilibrium. A shift represents a 'disturbance' or 'shock' to a market in (or adjusting to) equilibrium. – Initially a shift induces a state of: excess demand, or excess supply Four (4) situations: Four (4) situations: (text 3.15)3.15 – increased demand – decreased demand – increased supply – decreased supply use Eggs as example

27 D income effect D complement S S D substitute D changed preference or "taste" for cars previous next

28 minimum price controls (price floors) minimum price controls (price floors) – lead to surpluses if P min > P* (text fig 3.18b; [4.7, 5e])fig 3.18b maximum price controls (price ceilings) maximum price controls (price ceilings) – lead to shortages if P max < P* (text fig 3.18a; [4.7, 5e])fig 3.18a Black Markets / Scalping: Black Markets / Scalping: – illegal markets sometimes caused by price ceilings or other forms of under-pricing – ticket scalping (also called "touting") Price Controls create Disequilibrium

29 Homework Exercises 1.Q2 1.Q2 S & R 67, S p.89S & R 67 "Apartments" 2.Multichoice & Review Questions 1-4 Multichoice & Review Questions 1-4Multichoice & Review Questions 1-4 You may download and print graph paper and templates from Moodle More Multichoice ExercisesExercises

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31 Increase left up Decrease From Fig 3.7. P P' Q Q'

32 Decrease right down Increase A fall in price causes an increase in Quantity Demanded. P' P Q' Q

33 Fig 2.10a Increase right up Increase in Quantity Supplied

34 a 'Giffen Good' breaks the Law of Demand in this example, there is a weekly budget constraint for drinks of $21 What if the price of water increases to $3 per bottle?

35 contrast: when family can reduce total Q in this example, there is a weekly budget constraint for drinks of $30

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39 Review Questions 1.If the price of building timber falls, what will be the impact on the building timber market? what will be the impact on the building bricks market? 2.Childcare workers get a 10% pay increase. for the following, answer Increase, Decrease, or No Change How will this affect their demand for cameras? How will this affect the supply of child-care services? 3.Suppose there is a shortage of agricultural machinery and a surplus of guns in the economy. How should the price mechanism ensure that allocative efficiency is achieved? 4.Explain ticket scalping at Eden Park when NZ plays Australia (solution)solution back

40 Fig 2.6 review question 1 Building Timber Building Bricks

41 click for Q scalp and P scalp think of Eden Park: NZ vs. Australia

42 Ticket Scalping Example Explain ticket scalping (also known as ticket touting) at major events such as the World CupGrand Final, or a major rock concert. Ticket scalping is kind of black market.Equilibrium market price is (or is likely to be) above official price; hence excess demand or shortage of tickets, creating an opportunity to resell at a price above the equilibrium market price. The equilibrium price is not known as each event represents a unique market P scalp Q back

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46 graph back solution

47 back click for alternative policy option: subsidysubsidy S & R 62 fig 3.19


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