Download The market system

The market mechanism
 Outline

1. Introduction

2. Markets versus planning

3. Demand and supply

4. Movements & shifts in demand & supply
1. Introduction
 What

is economics about?
Scarce resources
• Resources = factors of production

Choice = sacrifice
• opportunity cost

Rational choice
• consumers - ‘value for money’
• firms - profit
• benefits versus costs

Marginal costs v. marginal benefits
2. Markets v. central planning
 How


Planned or command economy
Advantages
•
•
•
•

should resources be allocated?
high investment & economic growth
low unemployment
equal distribution of income
environment
Disadvantages
•
•
•
•
complex economy - information?
Inefficient allocation of resources
absence of incentives
loss of liberty
Free market
 Decentralised
decision-making
 Self-interested behaviour




resources allocated automatically
efficient allocation of resources
incentives - e.g. efficient firms make
bigger profits
competition enhances consumer
sovereignty
 ‘The
pursuit of private gain results in
the social good’
Classifying economic systems
Totally
planned
economy
Totally
free-market
economy
Classifying economic systems
Early 1980s
Totally
planned
economy
N. Korea China
Poland
Cuba
UK
France
USA
Hong
Kong
Totally
free-market
economy
Classifying economic systems
Early 1980s
Totally
planned
economy
N. Korea China
Poland
Cuba
France UK
USA
Hong
Kong
Totally
free-market
economy
N. Korea
Cuba
China
Poland France
USA
UK
China
(Hong
Kong)
Early 2000s
3. The market - demand & supply
 Exchange



markets - prices act as a signal
Producer (supply)
Consumer (demand)
 Competitive




market
medium of exchange
competition
full information
strong institutions & social custom
3.1 Consumer demand
 Determinants

of consumer demand
(a) price
• demand curve & demand function

Qd= a - bP
• Movements along the demand curve


Price rise – move up
Price fall – move down
Market demand for potatoes
(monthly)
Point
Market demand
Price
(pence per kg) (tonnes 000s)
100
Price (pence per kg)
A
20
700
80
60
40
A
20
Demand
0
0
100
200
300
400
500
fig
Quantity (tonnes:
000s)
600
700
800
Price (pence per kg)
Market demand for potatoes
(monthly)
100
80
Market demand
Point
Price
(pence per kg) (tonnes 000s)
A
20
700
B
40
500
60
B
40
A
20
Demand
0
0
100
200
300
400
500
fig
Quantity (tonnes:
000s)
600
700
800
Price (pence per kg)
Market demand for potatoes
(monthly)
100
80
Market demand
Point
Price
(pence per kg) (tonnes 000s)
A
20
700
B
C
40
60
500
350
C
60
B
40
A
20
Demand
0
0
100
200
300
400
500
fig
Quantity (tonnes:
000s)
600
700
800
Market demand for potatoes
(monthly)
Price (pence per kg)
100
D
80
C
Market demand
Point
Price
(pence per kg) (tonnes 000s)
A
20
700
B
C
D
40
60
80
500
350
200
60
B
40
A
20
Demand
0
0
100
200
300
400
500
fig
Quantity (tonnes:
000s)
600
700
800
Market demand for potatoes
(monthly)
E
Price (pence per kg)
100
D
80
C
60
Market demand
Point
Price
(pence per kg) (tonnes 000s)
A
20
700
B
C
D
E
40
60
80
100
500
350
200
100
B
40
A
20
Demand
0
0
100
200
300
400
500
fig
Quantity (tonnes:
000s)
600
700
800
Consumer demand
 Determinants





of demand (shifts)
(b) income - level & distribution
(c) price of substitutes & complements
(d) demography & age structure
(e) tastes & fashion - advertising
(f) seasonal
• (b)-(f) lead to shifts in the demand curve
Supply
 The


supply curve & function
Qs = a + bP
Movements along the curve
• Price changes

Shifts in the supply curve
• Changes in other determinants
Market supply of potatoes (monthly)
100
Supply
P
80
Price (pence per kg)
a
20 100
60
40
a
20
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
Q
800
Market supply of potatoes (monthly)
100
Supply
P
Price (pence per kg)
80
a
b
20 100
40 200
60
b
40
a
20
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
Q
800
Market supply of potatoes (monthly)
100
Supply
P
Price (pence per kg)
80
a
b
c
c
60
20 100
40 200
60 350
b
40
a
20
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
Q
800
Market supply of potatoes (monthly)
100
Supply
d
Price (pence per kg)
80
a
b
c
d
c
60
P
Q
20
40
60
80
100
200
350
530
b
40
a
20
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
Market supply of potatoes (monthly)
100
e
Supply
d
Price (pence per kg)
80
P
a 20
b 40
c 60
d 80
e 100
c
60
b
40
a
20
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
Q
100
200
350
530
700
3.2 Supply
 Determinants




of supply (shifts)
technological innovation - product and/or
process
change in price of factor inputs
disasters - natural & human
strikes, regulation, organisation of the
firm