4.7 Markets

1. 4.7 Markets 4.7.1 Market Forces 4.7.2 Shifts in Demand 4.7.3 Shifts in Supply 4.7.4 Some Examples 4.7.5 Summary

2. Application “Growers scalded by the weak price of tea” Alan Hamilton, The Times, 25th July 2007 • UK consumers paying far less for tea than we did 30 years ago • Price is less than 1p a cup and the real price is a quarter of what it was in 1977 • Production stands at 3.5 million tonnes from 36 countries • UK demand starting to rise at specialist end but static for standard tea; global supply is 2% too great each year.

3. 4.7.1 Market Forces Market Demand - aggregation of individual demands Market Supply - aggregation of all MC curves for firms P S = SMC P1 Equilibrium Pe D = Sd Qe Qs Q Qd

4. Consumer Surplus S = SMC Pe Producer Surplus D = Sd Qe

5. 4.7.2 Shifts in Supply Left Right Change in input prices Cost of technology Government Intervention: Subsidies Down Up Taxes

6. Supply Shift S 1 S P P1 Pe D Q1 Qe Q’ Q

7. Subsidies and Taxes S + Tax S P S + Subsidy Pt Pe Ps D Qt Qe Qs Q

8. 4.7.3 Shifts in Demand Left Right Change in income Change in price of substitutes Change in price of complements Change in income (inferior good)

9. Demand Shift S P P1 Pe D1 D Qe Q1 Q’ Q

10. 4.7.4 Some Examples Market for Palladium S P P1 Pe D1 D Q1 Qe Q

11. Market for 1980s Music P S1 S2 P2 P1 D2 D1 Q1 Q2 Q

12. “Market” for Ivory P S2 S1 P2 P1 D Q2 Q Q1

13. 4.7.5 Summary • Markets allocate resources • Consumer and producer surplus arises at equilibrium • Demand and supply curves shift with a number of factors