1. Markets, Demand and Supply

2. Demand The relationship between demand and price The demand curve
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)3

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

5. Market demand for potatoes (monthly)
Point
Price
(pence per kg) 20 40
Market demand
(tonnes 000s)
700
500 A B
Price (pence per kg) B A
Demand
Quantity (tonnes: 000s) 5

6. Market demand for potatoes (monthly)
Point
Price
(pence per kg) 20 40 60
Market demand
(tonnes 000s)
700
500
350 A B C C
Price (pence per kg) B A
Demand
Quantity (tonnes: 000s) 6

7. Market demand for potatoes (monthly)
Point
Price
(pence per kg) 20 40 60 80
Market demand
(tonnes 000s)
700
500
350
200 A B C D D C
Price (pence per kg) B A
Demand
Quantity (tonnes: 000s) 7

8. Market demand for potatoes (monthly)
Point
Price
(pence per kg) 20 40 60 80
100
Market demand
(tonnes 000s)
700
500
350
200
100 A B C D E D C
Price (pence per kg) B A
Demand
Quantity (tonnes: 000s) 8

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. An increase in demand D1 D0 P Price O Q0 Q1 Quantity
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 P
Price D0 O Q0 Q1
Quantity 10

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

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

13. Supply Relationship between supply and price The supply curve
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)14

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

16. Market supply of potatoes (monthly)20 40 Q
100
200 a b
Price (pence per kg) b a
Quantity (tonnes: 000s) 16

17. Market supply of potatoes (monthly)20 40 60 Q
100
200
350 a b c c
Price (pence per kg) b a
Quantity (tonnes: 000s) 17

18. Market supply of potatoes (monthly)d P 20 40 60 80 Q
100
200
350
530 a b c d c
Price (pence per kg) b a
Quantity (tonnes: 000s) 18

19. Market supply of potatoes (monthly)d P 20 40 60 80
100 Q
100
200
350
530
700 a b c d e c
Price (pence per kg) b a
Quantity (tonnes: 000s) 19

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. Shifts in the supply curve
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 S0
Increase O Q 21

22. Shifts in the supply curve
Decrease
Increase O Q 22

23. Q Which way will the market supply of pizzas shift if the price of flour falls?
Right
Left
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)
Supply D d C c
Price (pence per kg) b B a A
Demand
Quantity (tonnes: 000s) 25

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

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

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

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 curveP S
Initial equilibrium at point g g
Pe1 D1 O
Qe1 Q 33

34. Effect of a shift in the demand curveP S g
Pe1 D1 O
Qe1 Q 34

35. Effect of a shift in the demand curveP S g
Pe1 D2 D1 O
Qe1 Q 35

36. Effect of a shift in the demand curveP S i
New equilibrium at point i
Pe2 g h
Pe1 D2 D1 O
Qe1
Qe2 Q 36

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 curveg
Initial equilibrium at point g
Pe1 D O
Qe1 Q 38

39. Effect of a shift in the supply curveg
Pe1 D O
Qe1 Q 39

40. Effect of a shift in the supply curveg
Pe1 D O
Qe1 Q 40

41. Effect of a shift in the supply curvek
Pe3 j g
New equilibrium at point k
Pe1 D O
Qe3
Qe1 Q 41

42. Q The diagram shows the market for cocoa
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
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
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
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