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Markets, Demand and
Supply
Markets, Demand and
Supply
Economic SystemsEconomic Systems
Classifying economic systems methods of classification
classification by degree of government controlcommand economies
free-market economies
mixed economies
other classifications the informal economy
the not-for profit sector
Classifying economic systems methods of classification
classification by degree of government controlcommand economies
free-market economies
mixed economies
other classifications the informal economy
the not-for profit sector
Economic SystemsEconomic Systems
The command economy features of a command economy planning
consumption and investmentmatching of inputs and outputsdistribution 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 investmentmatching of inputs and outputsdistribution of output
Advantages of a command economy high investment, high and stable growth social goals pursued low unemployment
Economic SystemsEconomic Systems
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
Economic SystemsEconomic Systems
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
Economic SystemsEconomic Systems
Interdependence of markets effect of a rise in demand
effect in market for that good
Interdependence of markets effect of a rise in demand
effect in market for that good
Goods Market
Dg shortage(Dg > Sg)
Pg Sg
Dguntil Dg = Sg
The price mechanism:the effect of a rise in demand
The price mechanism:the effect of a rise in demand
Economic SystemsEconomic Systems
Interdependence of markets effect of a rise in demand
effect in market for that goodeffect in factor markets
Interdependence of markets effect of a rise in demand
effect in market for that goodeffect in factor markets
Goods Market
Dg shortage(Dg > Sg)
Pg Sg
Dguntil Dg = Sg
Factor Market
Sg Sf
Df until Df = Sf
Df shortage(Df > Sf)
Pf
The price mechanism:the effect of a rise in demand
The price mechanism:the effect of a rise in demand
Economic SystemsEconomic Systems
Interdependence of markets effect of a rise in demand
effect in market for that goodeffect in factor marketseffect in other goods markets
Interdependence of markets effect of a rise in demand
effect in market for that goodeffect in factor marketseffect in other goods markets
Economic SystemsEconomic Systems
Interdependence of markets effect of a rise in demand
effect in market for that goodeffect in factor marketseffect in other goods marketseffect in other factor markets
Interdependence of markets effect of a rise in demand
effect in market for that goodeffect in factor marketseffect in other goods marketseffect in other factor markets
Economic SystemsEconomic Systems
Interdependence of markets effect of a rise in demand
effect in market for that goodeffect in factor marketseffect in other goods marketseffect in other factor markets
Competitive markets
Interdependence of markets effect of a rise in demand
effect in market for that goodeffect in factor marketseffect in other goods marketseffect in other factor markets
Competitive markets
Economic SystemsEconomic Systems
Interdependence of markets effect of a rise in demand
effect in market for that goodeffect in factor marketseffect in other goods marketseffect in other factor markets
Competitive markets perfectly competitive markets
Interdependence of markets effect of a rise in demand
effect in market for that goodeffect in factor marketseffect in other goods marketseffect in other factor markets
Competitive markets perfectly competitive markets
Economic SystemsEconomic Systems
Interdependence of markets effect of a rise in demand
effect in market for that goodeffect in factor marketseffect in other goods marketseffect in other factor markets
Competitive markets perfectly competitive markets everyone is a price taker
Interdependence of markets effect of a rise in demand
effect in market for that goodeffect in factor marketseffect in other goods marketseffect in other factor markets
Competitive markets perfectly competitive markets everyone is a price taker
Economic SystemsEconomic Systems
Interdependence of markets effect of a rise in demand
effect in market for that goodeffect in factor marketseffect in other goods marketseffect in other factor markets
Competitive markets perfectly competitive markets everyone is a price taker why study perfect markets?
Interdependence of markets effect of a rise in demand
effect in market for that goodeffect in factor marketseffect in other goods marketseffect in other factor markets
Competitive markets perfectly competitive markets everyone is a price taker why study perfect markets?
DemandDemand
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
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
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Pri
ce (
pen
ce p
er k
g)
Price(pence per kg)
20
Market demand(tonnes 000s)
700A
Point
A
Market demand for potatoes (monthly)Market demand for potatoes (monthly)
Demand
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Pri
ce (
pen
ce p
er k
g)
Price(pence per kg)
20
40
Market demand(tonnes 000s)
700
500
A
B
Point
A
B
Demand
Market demand for potatoes (monthly)Market demand for potatoes (monthly)
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Pri
ce (
pen
ce p
er k
g)
Price(pence per kg)
20
40
60
Market demand(tonnes 000s)
700
500
350
A
B
C
Point
A
B
C
Demand
Market demand for potatoes (monthly)Market demand for potatoes (monthly)
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Pri
ce (
pen
ce p
er k
g)
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
Market demand for potatoes (monthly)Market demand for potatoes (monthly)
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Pri
ce (
pen
ce p
er k
g)
Price(pence per kg)
20
40
60
80
100
Market demand(tonnes 000s)
700
500
350
200100
A
B
C
D
E
Point
A
B
C
D
E
Demand
Market demand for potatoes (monthly)Market demand for potatoes (monthly)
DemandDemand
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
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
D1
Pric
e
P
O Q0 Q1
Quantity
An increase in demandAn 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 to
enter the market
The supply curve assumptions the axes illustrates how much would be supplied at
each 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 to
enter the market
The supply curve assumptions the axes illustrates how much would be supplied at
each price
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Pri
ce (
pen
ce p
er k
g)
Quantity (tonnes: 000s)
Supply
a
P
20
Q
100a
Market supply of potatoes (monthly)Market supply of potatoes (monthly)
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Pri
ce (
pen
ce p
er k
g)
Quantity (tonnes: 000s)
Supply
a
b
P
20 40
Q
100200
ab
Market supply of potatoes (monthly)Market supply of potatoes (monthly)
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Pri
ce (
pen
ce p
er k
g)
Quantity (tonnes: 000s)
Supply
a
b
c
P
20 40 60
Q
100200350
abc
Market supply of potatoes (monthly)Market supply of potatoes (monthly)
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Pri
ce (
pen
ce p
er k
g)
Quantity (tonnes: 000s)
Supply
a
b
c
d P
20 40 60 80
Q
100200350530
abcd
Market supply of potatoes (monthly)Market supply of potatoes (monthly)
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Pri
ce (
pen
ce p
er k
g)
Quantity (tonnes: 000s)
Supply
a
b
c
d
e
P
20 40 60 80100
Q
100200350530700
abcde
Market supply of potatoes (monthly)Market supply of potatoes (monthly)
SupplySupply
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
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
P
QO
S0
Increase
Shifts in the supply curveShifts in the supply curve
S1
P
QO
S2 S0 S1
IncreaseDecrease
Shifts in the supply curveShifts in the supply curve
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
significance of “equilibrium”
Demand and supply curves
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
The determination of market equilibrium (potatoes: monthly)
The determination of market equilibrium (potatoes: monthly)
Quantity (tonnes: 000s)
E
D
C
Aa
c
d
e
Supply
Demand
Pri
ce (
pen
ce p
er k
g)
Aa
Bb
The Determination of PriceThe 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
Equilibrium price and output response to shortages and surpluses
significance of “equilibrium”
Demand and supply curves effect of price being above equilibrium
The Determination of PriceThe 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
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
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
E
C
B
Aa
b
c
e
Supply
Demand
Pri
ce (
pen
ce p
er k
g)
D dSURPLUS
(330 000)
The determination of market equilibrium (potatoes: monthly)
The determination of market equilibrium (potatoes: monthly)
The Determination of PriceThe 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
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
The Determination of PriceThe 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 equilibriumshortage price rises
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 equilibriumshortage price rises
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
E
D
C
Aa
c
d
e
Supply
Demand
Pri
ce (
pen
ce p
er k
g)
Bb
The determination of market equilibrium (potatoes: monthly)
The determination of market equilibrium (potatoes: monthly)
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
E
D
C
B
Aa
b
c
d
e
Supply
Demand
Pri
ce (
pen
ce p
er k
g)
SHORTAGE
(300 000)
The determination of market equilibrium (potatoes: monthly)
The determination of market equilibrium (potatoes: monthly)
The Determination of PriceThe 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 equilibriumshortage price rises
equilibrium: where D = S
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 equilibriumshortage price rises
equilibrium: where D = S
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
D d
Qe
Quantity (tonnes: 000s)
E
B
Aa
b
e
Supply
Demand
Pri
ce (
pen
ce p
er k
g)The determination of market equilibrium
(potatoes: monthly)The determination of market equilibrium
(potatoes: monthly)
The Determination of PriceThe 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 demand curve
movement along S curve and new D curve
rise in demand (rightward shift) P rises
fall in demand (leftward shift) P falls
Effect of a shift in the demand curveEffect of a shift in the demand curveP
QO
Pe1
Qe1
S
D1
g
P
QO
Pe1
Qe1
S
D1
g
Effect of a shift in the demand curveEffect of a shift in the demand curve
P
QO
Pe1
Qe1
S
D1
D2
g
Effect of a shift in the demand curveEffect of a shift in the demand curve
P
QO
Pe1
Qe1
S
g h
D1
D2
Pe2
Qe2
i
Effect of a shift in the demand curveEffect of a shift in the demand curve
The Determination of PriceThe 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
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
The Determination of PriceThe 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
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
The Determination of PriceThe 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
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
The Determination of PriceThe 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
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
Effect of a shift in the supply curveEffect of a shift in the supply curveP
QO
Pe1
Qe1
D
S1
g
P
QO
Pe1
Qe1
D
S1
g
Effect of a shift in the supply curveEffect of a shift in the supply curve
P
QO
Pe1
Qe1
D
S1
S2
g
Effect of a shift in the supply curveEffect of a shift in the supply curve
P
QO
Pe1
Pe3
Qe3Qe1
D
S1
S2
j g
k
Effect of a shift in the supply curveEffect of a shift in the supply curve
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 be
ignored
The mixed economy types of intervention
use of taxes, subsidies and benefits legislation and regulationdirect provision by the government
Problems of a free-market economy competition may be limited inequality environment and social goals may be
ignored
The mixed economy types of intervention
use of taxes, subsidies and benefits legislation and regulationdirect provision by the government
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