Download Market_Mechanism07

Market mechanism
DEMAND/SUPPLY
Demand
 Demand
vs.
 Quantity demanded
- Substitution effect
Factors affecting Demand:
- Average income
- Population
- Prices of related goods
- Tastes
- Particular factors
- Income effect
Demand
100
Price
80
60
40
D
20
0
0
100
200
300
400 fig
Quantity
500
600
700
800
An increase in demand
Price
P
D0
O
Q0
Q1
fig 2.2
Quantity
D1
Supply
Supply
vs.
Quantity supplied
Factors determining Supply:
- Production costs
- technology
- input prices
- Prices of production substitutes
- Market organization
- Particular factors
Supply
100
S
80
Price
60
40
20
0
0
100
200
300
Quantity
400
500
600
700
800
Shifts in the supply curve
P
S2
S0
Decrease
O
S1
Increase
fig
Q
The Market Equilibrium
Shift in Demand
- Rightward shift: shortage at the original price, prices are
bid upward until supply and demand come back into
balance
Shift in Supply
Leftward shift: At the original price arises shortage 
the
price starts to rise, raising quantity supplied and lowering
quantity demanded
-
Market disequilibrium
Surplus
100
Supply
D
80
SURPLUS
d
Price
Cc
60
40
20
Demand
0
0
100
200
300
400 fig
Quantity
500
600
700
800
Dynamic cobweb
 Converging cobweb
 Diverging cobweb
 Persistent oscillations
Converging Cobweb
P
S
P1
P2
P0
D1
E0
D0
Q0
QD2
QS1
QD1
Q
Tasks:
1. Explain and graphically depict, what will happen in
the car market:
a) launching robots has saved costs in car factories
b) car prices has decreased
c) prices of buses as a production substitute has risen
d) increase in wages in car factories
e) increase in average income of people
2. Explain and graphically depict, what will happen
in the market of a product X:
a) consumer taste has changed in favour of a
substitute of the product X
b) production costs of the product X has
increased
c) production costs of the only substitute of
commodity X has increased
d) production costs of a perfect complement of the
commodity X has dropped rapidly
e) government has fully deregulated import tariffs
for commodity X