lecture 01 02. economic systems demand and supply
TRANSCRIPT
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
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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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
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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Economic SystemsEconomic Systems
• 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
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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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
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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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
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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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
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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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
The price mechanism:
the effect of a rise in
demand
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Economic SystemsEconomic Systems
• Interdependence of markets – effect of a rise in demand
• effect in market for that good
• effect in factor markets
• Interdependence of markets – effect of a rise in demand
• effect in market for that good
• effect in factor markets
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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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 ↑
The price mechanism:
the effect of a rise in
demand
The price mechanism:
the effect of a rise in
demand
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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Economic SystemsEconomic Systems
• Interdependence of markets – effect of a rise in demand
• effect in market for that good
•effect in factor markets
• effect in other goods markets
• Interdependence of markets – effect of a rise in demand
• effect in market for that good
• effect in factor markets
• effect in other goods markets
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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Economic SystemsEconomic Systems
• Interdependence of markets – effect of a rise in demand
• effect in market for that good
•effect in factor markets
• effect in other goods markets
• effect in other factor markets
• Interdependence of markets – effect of a rise in demand
• effect in market for that good
• effect in factor markets
• effect in other goods markets
• effect in other factor markets
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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Economic SystemsEconomic Systems
• Interdependence of markets – effect of a rise in demand
• effect in market for that good
•effect in factor markets
• effect in other goods markets
• effect in other factor markets
•Competitive markets
• Interdependence of markets – effect of a rise in demand
• effect in market for that good
• effect in factor markets
• effect in other goods markets
• effect in other factor markets
• Competitive markets
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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Economic SystemsEconomic Systems
• Interdependence of markets – effect of a rise in demand
• effect in market for that good
•effect in factor markets
• effect in other goods markets
• effect in other factor markets
• Competitive markets
– perfectly competitive markets
• Interdependence of markets – effect of a rise in demand
• effect in market for that good
• effect in factor markets
• effect in other goods markets
• effect in other factor markets
• Competitive markets
– perfectly competitive markets
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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Economic SystemsEconomic Systems
• Interdependence of markets – effect of a rise in demand
• effect in market for that good
• effect in factor markets
• effect in other goods markets
• effect 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 good
• effect in factor markets
• effect in other goods markets
• effect in other factor markets
• Competitive markets
– perfectly competitive markets
– everyone is a price taker
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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Economic SystemsEconomic Systems
• Interdependence of markets – effect of a rise in demand
• effect in market for that good
• effect in factor markets
• effect in other goods markets
• effect 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 good
• effect in factor markets
• effect in other goods markets
• effect in other factor markets
• Competitive markets
– perfectly competitive markets
– everyone is a price taker
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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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
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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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
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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
40
Market demand
(tonnes 000s)
700
500
A
B
Point
A
B
Demand
Market demand for potatoes (monthly)
M k t d d f t t
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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
40
60
Market demand
(tonnes 000s)
700
500
350
A
B
C
Point
A
B
C
Demand
Market demand for potatoes (monthly)
M k t d d f t t
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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
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)
M k t d d f t t
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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
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
Market demand for potatoes (monthly)
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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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
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D1
Price
P
O Q0 Q1
Quantity
An increase in demand
D0
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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 )
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0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Price
(pence
perkg)
Quantity (tonnes: 000s)
Supply
a
P 20
Q 100a
Market supply of potatoes (monthly)
M k t l f t t ( thl )
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0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Price
(pence
perkg)
Quantity (tonnes: 000s)
Supply
a
b
P 20
40
Q 100
200
a
b
Market supply of potatoes (monthly)
M k t l f t t ( thl )
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0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Price
(pence
perkg)
Quantity (tonnes: 000s)
Supply
a
b
c
P 20
40
60
Q 100
200
350
a
b
c
Market supply of potatoes (monthly)
Market supply of potatoes ( thl )
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0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Price
(pence
perkg)
Quantity (tonnes: 000s)
Supply
a
b
c
dP
20
40
60
80
Q 100
200
350
530
a
b
c
d
Market supply of potatoes (monthly)
Market supply of potatoes ( thl )
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0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Price
(pence
perkg)
Quantity (tonnes: 000s)
Supply
a
b
c
d
e
P 20
40
60
80
100
Q 100
200
350
530
700
a
b
c
d
e
Market supply of potatoes (monthly)
S l
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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
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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P
QO
S 0
Shifts in the supply curve
Shifts in the supply curve
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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P
QO
S 0
Increase
S 1
Shifts in the supply curve
Shifts in the supply curve
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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P
QO
S 2 S 0 S 1
IncreaseDecrease
Shifts in the supply curve
Th D t i ti f P iTh D t i ti f P i
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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
The determination of market equilibrium
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
The determination of market equilibrium(potatoes: monthly)
Quantity (tonnes: 000s)
E
D
C
B
Aa
b
c
d
e
Supply
Demand
Price
(penc
e
perkg)
Th D t i ti f P iTh D t i ti f P i
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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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
Th D t i ti f P iTh D t i ti f P i
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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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
The determination of market equilibrium
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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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
Price
(penc
e
perkg)
D dSURPLUS
(330 000)
The determination of market equilibrium(potatoes: monthly)
Th D t i ti f P iTh D t i ti f P i
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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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
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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The determination of market equilibrium
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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
Price
(penc
e
perkg)
SHORTAGE
(300 000)
q(potatoes: monthly)
The Determination of PriceThe Determination of Price
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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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
• shortage → 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 equilibrium
• shortage → price rises
– equilibrium: where D = S
The determination of market equilibrium
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
D d
Q e
Quantity (tonnes: 000s)
E
B
Aa
b
e
Supply
Demand
Price
(penc
e
perkg)
q(potatoes: monthly)
The Determination of PriceThe Determination of Price
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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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 curve
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Effect of a shift in the demand curveP
QO
P e1
Qe1
S
D1
g
Effect of a shift in the demand curve
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P
QO
P e1
Qe1
S
D1
g
Effect of a shift in the demand curve
Effect of a shift in the demand curve
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P
QO
P e1
Qe1
S
D1
D2
g
Effect of a shift in the demand curve
Effect of a shift in the demand curve
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P
QO
P e1
Qe1
S
g h
D1
D2
P e2
Qe2
i
Effect of a shift in the demand curve
The Determination of PriceThe Determination of Price
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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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
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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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
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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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
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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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 curve
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pp yP
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Effect of a shift in the supply curve
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P
QO
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Qe1
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pp y
Effect of a shift in the supply curve
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P
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P e1
Qe1
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Effect of a shift in the supply curve
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P
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The Free-market EconomyThe Free-market Economy
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
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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
8/6/2019 Lecture 01 02. Economic Systems Demand and Supply
http://slidepdf.com/reader/full/lecture-01-02-economic-systems-demand-and-supply 58/58
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