4.7 Markets 4.7.1Market Forces 4.7.2Shifts in Demand 4.7.3Shifts in Supply 4.7.4Some Examples 4.7.5Summary

Application “Growers scalded by the weak price of tea” Alan Hamilton, The Times, 25 th July 2007 UK consumers paying far less for tea than we did 30 years ago Price is less than 1p a cup and the real price is a quarter of what it was in 1977 Production stands at 3.5 million tonnes from 36 countries UK demand starting to rise at specialist end but static for standard tea; global supply is 2% too great each year.

4.7.1 Market Forces Market Demand - aggregation of individual demands Market Supply - aggregation of all MC curves for firms P Q S =  MC D =  d Pe Qe Qd Qs P1 Equilibrium

S =  MC D =  d Pe Qe Consumer Surplus Producer Surplus

4.7.2 Shifts in Supply Change in input prices LeftRight Cost of technology Government Intervention: Subsidies Taxes Down Up

Supply Shift P Q S D S 1 P1 Pe QeQ1 Q’

Subsidies and Taxes P Q S D S + Subsidy S + Tax Pt Pe Ps QsQeQt

4.7.3 Shifts in Demand Change in income LeftRight Change in price of substitutes Change in price of complements Change in income (inferior good)

Demand Shift P Q S Pe Qe D D1 P1 Q1 Q’

P Q S Pe Qe D D1 P1 Q1 Market for Palladium Some Examples

P Q Market for 1980s Music P1 Q1 S1 S2 D2 D1 Q2 P2

P Q “Market” for Ivory S2 S1 Q2 P2 P1 Q1 D

4.7.5 Summary Markets allocate resources Consumer and producer surplus arises at equilibrium Demand and supply curves shift with a number of factors