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Markets, Demand and Supply. Demand The relationship between demand and price  the income effect  the substitution effect The demand curve  assumptions.

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Presentation on theme: "Markets, Demand and Supply. Demand The relationship between demand and price  the income effect  the substitution effect The demand curve  assumptions."— Presentation transcript:

1 Markets, Demand and Supply

2 Demand 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

3 The demand curve: The demand for potatoes (monthly)

4 Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) 20 Market demand (tonnes 000s) 700 A Point A Market demand for potatoes (monthly) Demand

5 Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) Market demand (tonnes 000s) ABAB Point A B Demand Market demand for potatoes (monthly)

6 Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) Market demand (tonnes 000s) ABCABC Point A B C Demand Market demand for potatoes (monthly)

7 Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) Market demand (tonnes 000s) ABCDABCD Point A B C D Demand Market demand for potatoes (monthly)

8 Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) Market demand (tonnes 000s) ABCDEABCDE Point A B C D E Demand Market demand for potatoes (monthly)

9 Demand 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

10 D1D1 Price P OQ0Q0 Q1Q1 Quantity An increase in demand D0D0 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

11 Q Which way will the market demand for petrol shift if the price of cars rises? A.Right B.Left C.No shift (movement along the curve)

12 Q Which way will the market demand for petrol shift if petrol becomes more expensive? A.Right B.Left C.No shift (movement along the curve)

13 Supply 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

14 The supply curve: The supply of potatoes (monthly)

15 Price (pence per kg) Quantity (tonnes: 000s) Supply a P 20 Q 100 a Market supply of potatoes (monthly)

16 Price (pence per kg) Quantity (tonnes: 000s) Supply a b P Q abab Market supply of potatoes (monthly)

17 Price (pence per kg) Quantity (tonnes: 000s) Supply a b c P Q abcabc Market supply of potatoes (monthly)

18 Price (pence per kg) Quantity (tonnes: 000s) Supply a b c d P Q abcdabcd Market supply of potatoes (monthly)

19 Price (pence per kg) Quantity (tonnes: 000s) Supply a b c d e P Q abcdeabcde Market supply of potatoes (monthly)

20 Supply 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

21 P QO S0S0 Increase Shifts in the supply curve S1S1 Possible 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

22 P QO S2S2 S0S0 S1S1 IncreaseDecrease Shifts in the supply curve

23 Q Which way will the market supply of pizzas shift if the price of flour falls? A.Right B.Left C.No shift (movement along the curve)

24 The Determination of Price Equilibrium price and output  response to shortages and surpluses  significance of ‘equilibrium’ Demand and supply curves

25 The determination of market equilibrium (potatoes: monthly) Quantity (tonnes: 000s) E D C c d e Supply Demand Price (pence per kg) A a B b

26 The Determination of Price Equilibrium price and output  response to shortages and surpluses  significance of ‘equilibrium’ Demand and supply curves  effect of price being above equilibrium  surplus  price falls

27 Quantity (tonnes: 000s) E C B A a b c e Supply Demand Price (pence per kg) D d SURPLUS ( ) The determination of market equilibrium (potatoes: monthly)

28 The Determination of Price Equilibrium price and output  response to shortages and surpluses  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

29 Quantity (tonnes: 000s) E D C B A a b c d e Supply Demand Price (pence per kg) SHORTAGE ( ) The determination of market equilibrium (potatoes: monthly)

30 The Determination of Price Equilibrium price and output  response to shortages and surpluses  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

31 D d QeQe Quantity (tonnes: 000s) E B A a b e Supply Demand Price (pence per kg) The determination of market equilibrium (potatoes: monthly)

32 The Determination of Price 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

33 Effect of a shift in the demand curve P Q O Pe1Pe1 Qe1Qe1 S D1D1 g Initial equilibrium at point g

34 P Q O Pe1Pe1 Qe1Qe1 S D1D1 g Effect of a shift in the demand curve

35 P Q O Pe1Pe1 Qe1Qe1 S D1D1 D2D2 g

36 P Q O Pe1Pe1 Qe1Qe1 S g h D1D1 D2D2 Pe2Pe2 Qe2Qe2 i New equilibrium at point i

37 The Determination of Price 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

38 Effect of a shift in the supply curve P Q O Pe1Pe1 Qe1Qe1 D S1S1 g Initial equilibrium at point g

39 P Q O Pe1Pe1 Qe1Qe1 D S1S1 g Effect of a shift in the supply curve

40 P Q O Pe1Pe1 Qe1Qe1 D S1S1 S2S2 g

41 P Q O Pe1Pe1 Pe3Pe3 Qe3Qe3 Qe1Qe1 D S1S1 S2S2 jg k New equilibrium at point k

42 Q The diagram shows the market for cocoa. Equilibrium is currently at point x. To which equilibrium point (1, 2, 3, 4, 5, 6, 7 or 8) will the market move if there is a rise in the cost of producing cocoa?

43 Q The diagram shows the market for cocoa. Equilibrium is currently at point x. To which equilibrium point (1, 2, 3, 4, 5, 6, 7 or 8) will the market move if there is a rise wages in the chocolate industry?

44 Q The diagram shows the market for cocoa. Equilibrium is currently at point x. To which equilibrium point (1, 2, 3, 4, 5, 6, 7 or 8) will the market move if there is speculation that the price of cocoa will fall?

45 Q The diagram shows the market for cocoa. Equilibrium is currently at point x. To which equilibrium point (1, 2, 3, 4, 5, 6, 7 or 8) will the market move if there is increased demand for chocolate and a new tax on cocoa?

46 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

47 The Free-market Economy Problems of a free-market economy  competition may be limited  inequality  environment and social goals may be ignored

48 Behavioural 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

49 Behavioural Economics 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

50 Behavioural Economics 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


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