Competitive markets & how they work

1. Competitive markets & how they work OCR Economics AS Level F581 Microeconomics

2. Lesson 1 Objectives • To be able to explain what exactly we mean by a market • To be able to explain the difference between notional and effective demand • To be able to explain the relationship between price and quantity demanded, using a graph to display a demand curve

3. To begin • You have 5 minutes to come up with as many uses of the word ‘market’ as you can (in relation to the world of Business, Commerce & Economics)

4. Definition of ‘Market’ Market: where or when buyers and sellers meet to trade or exchange products & services Examples include the stock market, housing market, local high streets, e-bay, the labour (jobs) market Within markets the level of demand and supply fluctuate and as a result so do prices

5. Who would like one of these?

6. Who can afford to buy one of these?

7. Definitions of Notional & Effective Demand Notional Demand : the desire for a product Effective Demand : desire for a product backed up by a willingness and ability to pay Demand : the quantity of a product that consumers are able & willing to purchase at various prices over a period of time

8. An example of a lack of effective demand

9. Relationship between price & quantity demanded • We assume ceterus paribus (that all other factors remain equal) • We focus on a period of time (e.g. a day, a week, a month, a year) • We assume that consumers are rational, seeking the cheapest purchase • There is an inverse relationship between price and quantity demanded – as prices rise, demand falls

10. Task: • Look at table 2.1 and Fig 2.1 on Page 25 • Turn over to Page 26 and complete the Benidorm holiday activity

11. Definitions of Demand Curve & Demand Schedule Demand curve : this shows the relationship between the quantity demanded and the price of a product Demand schedule : the data that is used to draw up a demand curve Movements along the demand curve : a change in quantity demanded in response to a change in price

12. Pass the BuckWhat can you recall from Lesson 1?

13. Lesson 2 Objectives • To be able to define and explain what we mean by consumer surplus • To recognise how price and quantity demanded can be used to calculate total revenue/total expenditure • To be able to describe the range of factors other than price that influence demand

14. How much would you pay to use Facebook or Twitter?

15. Globally, it’s estimated that we get €100 billion more in value from use of the internet than we pay for (click on the image below to read live on line)

16. Definition of Consumer Surplus • Consumer Surplus : the extra amount a consumer would be willing to pay for a product and service over and above the amount that actually is paid Consumer Surplus Price P Q Quantity

17. How have the following affected consumer surplus? • The introduction of a congestion charge in London • The arrival of Amazon and others in to the market for books • Price discrimination by low-cost airlines who charge different prices depending upon how far in advance customers book We’ll return to this concept later to see how consumer surplus is affected by market developments

18. Calculating Total Revenue/Total Expenditure • A demand curve is plotted against two axis • Price • Quantity • By multiplying price per unit by the number of units sold, we can determine the total revenue earned by firms which is also the total expenditure by consumers, at a given price • E.g. 200 units x £1.50 per unit = £300

19. Why is this important? • We will discover in future lessons how different products/services have demand that is more or less sensitive to price changes • Total revenue/expenditure can vary quite dramatically if demand and or prices fall • There may be an increase in revenue even if prices are cut, or a decrease in revenue even if prices are increased

20. Other factors that influence demand

21. Key income definitions • Disposable income : Income after taxes on income have been deducted and state benefits have been added • Real disposable income : As per disposable income but further adjusted to take account of changes in price level (inflation) • Normal goods : goods for which an increase in income leads to an increase in demand e.g. Plasma TV • Inferior goods : goods for which an increase in income leads to a fall in demand e.g. ‘Basics’/’Value’ branded foods • Substitutes : competing goods e.g. i-tunes vs CDs • Complements : goods for which there is joint demand e.g. houses and mortgages

22. The effect on the demand curve D1 D D2

23. Real Life Examples • What examples of these factors in action do you recall from the commodity presentations you did last term?

24. Talkabout • I’d like a volunteer to talk about factors other than price that influence demand • They have to talk for a minute and hopefully hit 6 key words

25. Lesson 3 objectives • To be able to understand how a supply curve is drawn from a supply schedule • To be able to explain what is meant by the producer surplus • To be able to describe the main influences on supply levels other than price

26. A supply curve S P Price Quantity

27. Definition of supply curves/schedules • Supply curve : this shows graphically the relationship between the quantity supplied and the price of a product • Supply schedule : the data from which a supply curve is drawn

28. The Producer Surplus Watch this video for an explanation of the producer surplus pajholden is a channel on YouTube worth looking at to support your studies (jodiecongirl is a better looking alternative!) • Producer surplus : the difference between the price a producer is willing to accept and the actual price

29. What effects supply levels other than price?

30. The effect on the supply curve S2 S S1

31. Next week… • Some practice paper questions to take stock • How demand & supply interact to create a market equilibrium price

32. Lesson 4 Objectives • To understand how to draw supply and demand charts that ‘commentate’ on changes in markets • To do this by watching a segment of ‘Trading Places’ together and drawing supply and demand charts that describe what happened • To be able to define and use the terms market equilibrium and market disequilibrium

33. Watch the section of Trading Places and note what’s happening • What are the key moments when • demand rises? • demand falls? • supply rises? As we watch it again, draw a supply and demand diagram to comment on what is happening

34. ‘Trading Places’ in Supply & Demand Graphs • The market opens, with price set at the level previous close (market equilibrium) • Duke & Duke start buying frozen OJ contracts and others follow suit believing the know something about the impending crop report (creating market disequilibrium) • The real crop report is released and proves to be a good one with a healthy crop. Buyers realise there won’t be a shortage of OJ afterall and want to get rid of frozen OJ contracts rather than be left with them. They start selling, flooding the market and resulting in demand falling (new market disequilibrium)

35. Key definitions Market equilibrium : the price and quantity at which supply and demand are level (also known as the ‘clearing price’) Market disequilibrium : any position in the market where demand and supply are not equal Surplus : an excess of supply over demand Shortage : an excess of demand over supply

36. Homework • In October 2007, on the day of the World Cup Final, it was reported that English rubgy fans were prepared to pay as much as £1000 for a ticket for the match. The actual price was £60. Use demand & supply concepts/diagrams to explain the situation • By contrast, earlier in the year it was reported that local cricket fans in Barbados were being offered tickets to watch World Cup matches for as little as $10. The actual price was $80. Again, use supply & demand concepts and diagrams to explain the situation • Due in on Friday Day5

37. Lesson Objectives • To understand the term elasticity in an Economics context • To consider how variables have relationships with each other • To understand that some of these variables will react with each other in more dramatic or less dramatic ways

38. Match these in to pairs that may be responsive to each other Eating hamburgers Getting a snog! Level of productivity at work Working outdoors Time spent in the gym Time spent at the driving range Amount of sleep The shape & tone of your body Getting Skin Cancer Money spent on a date Becoming obese Golf handicap

39. What Economic ‘relationships’ can you think of?

40. Key Definition Elasticity : the extent to which buyers and sellers respond to a change in market conditions

41. Plot these demand schedules on the same demand curve diagram Describe how each differs

42. Demand/Supply Curves and Elasticity • The steeper the curve the less sensitive the quantity of demand or supply is to a change in price: price inelastic • The shallower the curve the more sensitive the quantity of demand or supply is to a change in price : price elastic

43. Key definition Price Elasticity of Demand (PED) : the responsiveness of quantity demanded to a change in the price of the product Formula: % change in quantity % change in price Ignore whether it’s a negative or positive change Example Quantity demanded changes from 1000 units to 1400 units = 40% change This happens as a result of a price change from £20 to £15 = 25% change 40/25 = 1.6

44. Remember! You QUEUE before you PEE Elasticity =% change in Q% change in P

45. Calculate the price elasticity of demand 1.425 1 Outcome of 1 = unit elasticity Outcome of >1 = demand is ‘price elastic’ Outcome of <1 = demand is ‘price inelastic 0.625

46. Key Definitions Price elastic : where the percentage change in quantity demanded is sensitive to a change in price Price inelastic : where the percentage change in quantity demanded is insensitive to a change in price

47. vs vs Why might quantity demanded be more price sensitive for some products than others?

48. Match each picture to the elasticity outcome 1.425 0.625

49. Put the items in order, in terms of sensitivity of demand to a change in price

50. Lesson Objectives • To understand the term income elasticity of demand • To be able to calculate income elasticity of demand • To be able to describe the link between income elasticity and normal goods and inferior goods