lecture 01 02. economic systems demand and supply

8/6/2019 Lecture 01 02. Economic Systems Demand and Supply

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• ECONOMIC SYSTEMS

• DEMAND AND SUPPLY

• ECONOMIC SYSTEMS

• DEMAND AND SUPPLY



Economic SystemsEconomic Systems

• Classifying economic systems

– methods of classification

– classification by degree of governmentcontrol

• command economies

• free-market economies

• mixed economies

• Classifying economic systems

– methods of classification

– classification by degree of governmentcontrol

• command economies

• free-market economies

• mixed economies




• The command economy – features of a command economy

– planning

• consumption and investment• matching of inputs and outputs

• distribution of output

• Advantages of a command economy

– high investment, high and stable growth

– social goals pursued

– low unemployment

• The command economy – features of a command economy

– planning

• consumption and investment

• matching of inputs and outputs

• distribution of output

• Advantages of a command economy

– high investment, high and stable growth

– social goals pursued

– low unemployment




• Problems of a command economy – problems of gathering information

– expensive to administer

– inefficient allocation of resources

• inappropriate incentives

• no system of prices

– shortages and surpluses

– lack of response to consumer demand

• Problems of a command economy – problems of gathering information

– expensive to administer

– inefficient allocation of resources

• inappropriate incentives

• no system of prices

– shortages and surpluses

– lack of response to consumer demand




• The free-market economy – based on free decision making by individuals and

firms

– demand and supply decisions

– the price mechanism

• shortages and surpluses

– shortage → price rises

– surplus → price falls

• equilibrium price

– where demand equals supply

• response to change in demand and supply

• The free-market economy – based on free decision making by individuals and

firms

– demand and supply decisions

– the price mechanism

• shortages and surpluses

– shortage → price rises

– surplus → price falls

• equilibrium price

– where demand equals supply

• response to change in demand and supply




• Interdependence of markets – effect of a rise in demand

• effect in market for that good





Goods Market

Dg ↑ shortage

(Dg > S g )

P g ↑S g ↑

Dg ↓

until Dg = S g

The price mechanism:

the effect of a rise in

demand



demand






• effect in factor markets






Goods Market

Dg ↑ shortage

(Dg > S g )

P g ↑S g ↑

Dg ↓

until Dg = S g

Factor Market

S g ↑S f ↑

Df ↓

until Df = S f Df shortage

(Df > S f )

P f ↑



demand



demand






•effect in factor markets

• effect in other goods markets












• effect in other factor markets














•Competitive markets






• Competitive markets










– perfectly competitive markets


















– everyone is a price taker











DemandDemand

• The relationship between demand andprice

– the income effect

– the substitution effect

• The demand curve

– assumptions

– the axes

– illustrates how much would be demanded ateach price

• The relationship between demand andprice

– the income effect

– the substitution effect

• The demand curve

– assumptions

– the axes

– illustrates how much would be demanded ateach price



0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Quantity (tonnes: 000s)

Price

(pe

nce

perkg)

Price

(pence per kg)

20

Market demand

(tonnes 000s)

700A

Point

A

Market demand for potatoes (monthly)

Demand

M k d d f



0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


Price

(pe

nce

perkg)

Price

(pence per kg)

20

40

Market demand

(tonnes 000s)

700

500

A

B

Point

A

B

Demand


M k t d d f t t



0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


Price

(pe

nce

perkg)

Price

(pence per kg)

20

40

60

Market demand

(tonnes 000s)

700

500

350

A

B

C

Point

A

B

C

Demand


M k t d d f t t



0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


Price

(pe

nce

perkg)

Price

(pence per kg)

20

40

60

80

Market demand

(tonnes 000s)

700

500

350

200

A

B

C

D

Point

A

B

C

D

Demand


M k t d d f t t



0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


Price

(pe

nce

perkg)

Price

(pence per kg)

20

40

60

80

100

Market demand

(tonnes 000s)

700

500

350

200

100

A

B

C

D

E

Point

A

B

C

D

E

Demand




DemandDemand

• Other determinants of demand – Tastes & preferences

– number and price of substitute goods

– number and price of complementary goods

– income

– population

– expectations

• Movements along and shifts in thedemand curve

• Other determinants of demand – Tastes & preferences

– number and price of substitute goods

– number and price of complementary goods – income

– population

– expectations

• Movements along and shifts in thedemand curve

A i i d d



D1

Price

P

O Q0 Q1

Quantity

An increase in demand

D0



SupplySupply

• 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 toenter the market

• The supply curve

– assumptions – the axes

– illustrates how much would be supplied ateach price

• 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 toenter the market

• The supply curve

– assumptions – the axes

– illustrates how much would be supplied ateach price

M k t l f t t ( thl )



0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Price

(pence

perkg)


Supply

a

P 20

Q 100a

Market supply of potatoes (monthly)




0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Price

(pence

perkg)


Supply

a

b

P 20

40

Q 100

200

a

b





0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Price

(pence

perkg)


Supply

a

b

c

P 20

40

60

Q 100

200

350

a

b

c


Market supply of potatoes ( thl )



0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Price

(pence

perkg)


Supply

a

b

c

dP

20

40

60

80

Q 100

200

350

530

a

b

c

d


Market supply of potatoes ( thl )



0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Price

(pence

perkg)


Supply

a

b

c

d

e

P 20

40

60

80

100

Q 100

200

350

530

700

a

b

c

d

e


S l



SupplySupply

• Other determinants of supply – costs of production

– profitability of alternative products

– profitability of goods in joint supply

– technology

– Number of producers

– expectations of producers

• Movements along and shifts in thesupply curve

•Other determinants of supply – costs of production

– profitability of alternative products

– profitability of goods in joint supply

– technology

– Number of producers

– expectations of producers

• Movements along and shifts in thesupply curve

Shifts in the supply curve



P

QO

S 0





P

QO

S 0

Increase

S 1





P

QO

S 2 S 0 S 1

IncreaseDecrease


Th D t i ti f P iTh D t i ti f P i



The Determination of PriceThe Determination of Price

• Equilibrium price and output – response to shortages and surpluses

– significance of “equilibrium”

• Demand and supply curves

•Equilibrium price and output – response to shortages and surpluses


• Demand and supply curves

The determination of market equilibrium



0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

The determination of market equilibrium(potatoes: monthly)


E

D

C

B

Aa

b

c

d

e

Supply

Demand

Price

(penc

e

perkg)







• Demand and supply curves – effect of price being above equilibrium

• Equilibrium price and output

– response to shortages and surpluses










• surplus → price falls









0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


E

C

B

Aa

b

c

e

Supply

Demand

Price

(penc

e

perkg)

D dSURPLUS

(330 000)

The determination of market equilibrium(potatoes: monthly)









– effect of price being below equilibrium









0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


E

D

C

B

Aa

b

c

d

e

Supply

Demand

Price

(penc

e

perkg)

SHORTAGE

(300 000)

q(potatoes: monthly)










• shortage → price rises

– equilibrium: where D = S







• shortage → price rises

– equilibrium: where D = S




0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

D d

Q e


E

B

Aa

b

e

Supply

Demand

Price

(penc

e

perkg)

q(potatoes: monthly)





• 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 demand curve

– movement along S curve and new D curve



Effect of a shift in the demand curve



Effect of a shift in the demand curveP

QO

P e1

Qe1

S

D1

g




P

QO

P e1

Qe1

S

D1

g





P

QO

P e1

Qe1

S

D1

D2

g





P

QO

P e1

Qe1

S

g h

D1

D2

P e2

Qe2

i






•Effects of shifts in the demand curve – movement along S curve and new D curve



• Effects of shifts in the supply curve














– movement along D curve and new S curve
















• rise in supply (rightward shift) →P falls






– movement along D curve and new S curve• rise in supply (rightward shift) →P falls










• rise in supply (rightward shift) →P falls

• fall in supply (leftward shift) →P rises






– movement along D curve and new S curve• rise in supply (rightward shift) →P falls

• fall in supply (leftward shift) →P rises

Effect of a shift in the supply curve



pp yP

QO

P e1

Qe1

D

S 1

g




P

QO

P e1

Qe1

D

S 1

g

pp y




P

QO

P e1

Qe1

D

S 1

S 2

g

pp y




P

QO

P e1

P e3

Qe3Qe1

D

S 1

S 2

j g

k

pp y

The Free-market EconomyThe 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

• 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




The Free-market EconomyThe Free market Economy

• Problems of a free-market economy

– competition may be limited

– inequality

– environment and social goals may beignored

• The mixed economy

– types of intervention• use of taxes, subsidies and benefits

• legislation and regulation

• direct provision by the government

• Problems of a free-market economy

– competition may be limited

– inequality

– environment and social goals may beignored

• The mixed economy

–types of intervention

• use of taxes, subsidies and benefits

• legislation and regulation

• direct provision by the government

lecture 01 02. economic systems demand and supply

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