AS Economics Price Mechanism in Action

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AS Economics Price Mechanism in Action

  1. 1. AS MicroThe Price Mechanism in Action
  2. 2. Functions of the Price Mechanism1. Allocate – the market mechanism allocates scarce resources2. Ration – prices serve to ration scarce resources when demand outstrips supply3. Signal – market prices adjust to demonstrate where resources are required, and where they are not.4. Incentive – when the price of a product rises, the quantity supplied increased, this is due to the incentive function
  3. 3. Diagrams matter!Diagram must havesFully labeledOriginal and new equilibriumDemand and supply the correct way roundWell explained – you must explain why the curve has shifted, in detailThink about the elasticity – e.g. oil has inelastic demand and supply
  4. 4. Shift Equilibrium PriceDemand increases HigherDemand decreases LowerSupply increases LowerSupply decreases Higher
  5. 5. Shift Equilibrium Price Equilibrium QuantityDemand increases Higher HigherDemand decreases Lower LowerSupply increases Lower HigherSupply decreases Higher Lower
  6. 6. Which direction?Market Change Shift in Supply Rise or Fall in or Demand? Market Price for Crude Oil?A deep recession in many ofthe world’s advancedeconomiesOPEC decides to introducelower output quotas for eachof their members
  7. 7. Which direction?Market Change Shift in Supply Rise or Fall in or Demand? Market Price for Crude Oil?A deep recession in many ofthe world’s advanced DEMANDeconomiesOPEC decides to introducelower output quotas for eachof their members
  8. 8. Using an analysis diagramPrice S1 P1 D1 Q1 Quantity of crude oil
  9. 9. Using an analysis diagramPrice S1 P1 D1 D2 Q1 Quantity of crude oil
  10. 10. Using an analysis diagramPrice S1 P1 P2 D1 D2 Q2 Q1 Quantity of crude oil
  11. 11. Which direction?Market Change Shift in Supply Rise or Fall in or Demand? Market Price for Crude Oil?A deep recession in many ofthe world’s advanced DEMANDeconomiesOPEC decides to introducelower output quotas for each SUPPLYof their members
  12. 12. Using an analysis diagram Price S1 P1 D1 Q1 Quantity of crude oil
  13. 13. Using an analysis diagram S2 Price S1 P1 D1 Q1 Quantity of crude oil
  14. 14. Using an analysis diagram S2 Price S1 P2 P1 D1 Q2 Q1 Quantity of crude oil
  15. 15. The effects of high oil prices • Exploration Oil Industry & Drilling • Investment • Cost of living Consum ers • Real incomes • Oil substitutes Related sectors • Oil supply chain industriesP6
  16. 16. StakeholdersGroups who benefit from high Groups who lose out from highoil prices oil pricesOil companies themselvesIndustries supplying petroleumbusinessesOil exporting nationsGovernment – oil taxesRenewable energy industry
  17. 17. StakeholdersGroups who benefit from high Groups who lose out from highoil prices oil prices Consumers of products thatOil companies themselves uses oil as essential inputIndustries supplying petroleum Transport businesses e.g.businesses airlines, road haulage Consumer goods businessesOil exporting nations (less real income to spend)Government – oil taxesRenewable energy industry
  18. 18. The Global Market for Aluminium
  19. 19. Shifts in supply & demandMarket Change Shift in Supply Rise or Fall in or Demand? Market Price for Aluminium?A fall in demand for new long-haulaircraftTighter fuel-efficiency standards for newvehicles in the USAA persistent fall in the world price ofsteelA rise in the price of bauxite (used inmanufacturing aluminium)
  20. 20. Shifts in supply & demandMarket Change Shift in Supply Rise or Fall in or Demand? Market Price for Aluminium?A fall in demand for new long-haul DEMAND FALLaircraftTighter fuel-efficiency standards for newvehicles in the USAA persistent fall in the world price ofsteelA rise in the price of bauxite (used inmanufacturing aluminium)
  21. 21. Shifts in supply & demandMarket Change Shift in Supply Rise or Fall in or Demand? Market Price for Aluminium?A fall in demand for new long-haul DEMAND FALLaircraftTighter fuel-efficiency standards for new DEMAND RISEvehicles in the USAA persistent fall in the world price ofsteelA rise in the price of bauxite (used inmanufacturing aluminium)
  22. 22. Shifts in supply & demandMarket Change Shift in Supply Rise or Fall in or Demand? Market Price for Aluminium?A fall in demand for new long-haul DEMAND FALLaircraftTighter fuel-efficiency standards for new DEMAND RISEvehicles in the USAA persistent fall in the world price of DEMAND FALLsteelA rise in the price of bauxite (used inmanufacturing aluminium)
  23. 23. Shifts in supply & demandMarket Change Shift in Supply Rise or Fall in or Demand? Market Price for Aluminium?A fall in demand for new long-haul DEMAND FALLaircraftTighter fuel-efficiency standards for new DEMAND RISEvehicles in the USAA persistent fall in the world price of DEMAND FALLsteelA rise in the price of bauxite (used in SUPPLY RISEmanufacturing aluminium)
  24. 24. Shifts in supply & demandA fall in demand for new long-haul DEMAND FALLaircraft Price of Aluminium Supply P1 Demand Q1 Quantity of Aluminium
  25. 25. Shifts in supply & demandA fall in demand for new long-haul DEMAND FALLaircraft Price of Aluminium Supply P1 Demand D2 Q1 Quantity of Aluminium
  26. 26. Shifts in supply & demandA fall in demand for new long-haul DEMAND FALLaircraft Price of Aluminium Supply P1 P2 Demand D2 Q2 Q1 Quantity of Aluminium
  27. 27. Shifts in supply & demandA rise in the price of bauxite (used in SUPPLY RISEmanufacturing aluminium) Price of S2Aluminium Supply P1 P2 Demand D2 Q2 Q1 Quantity of Aluminium
  28. 28. Shifts in supply & demandA rise in the price of bauxite (used in SUPPLY RISEmanufacturing aluminium) Price of S2Aluminium Supply P3 P1 P2 Demand D2 Q3 Q2 Q1 Quantity of Aluminium
  29. 29. Inter-related markets Price of Price ofAluminium Pepsi Max S1 P1 Si Pi D1 Di Quantity of Q1 Quantity of Qi Aluminium Pepsi Max
  30. 30. Inter-related markets Price of Price ofAluminium Pepsi Max S1 P2 P1 Si Pi D2 D1 Di Quantity of Q1 Q2 Quantity of Qi Aluminium Pepsi Max
  31. 31. Inter-related markets Price of Price ofAluminium Pepsi Max S1 Sii P2 P1 Si Pii Pi D2 D1 Di Quantity of Q1 Q2 Qii Qi Quantity of Aluminium Pepsi Max
  32. 32. Application Analysis EvaluationGood application opens the door togood analysis and good evaluation
  33. 33. Why are prices volatile in the markets for many commodities? Low Low Volatile Specula Ped Pes Supply tors
  34. 34. Using analysis diagramsPrice S1 Price P2 P1 D1 D2 Quantity Quantity
  35. 35. Using analysis diagramsPrice S1 Price S1 P2 P1 D1 D2 D1 Quantity Quantity
  36. 36. Using analysis diagramsPrice S1 Price S1 S2 P2 P1 P1 P2 D1 D2 D1 Quantity Quantity
  37. 37. Problems arising from price volatility Risk and Uncertainty • Uncertain incomes and profits • May limit investment by poorer farmers Risk of poverty and unemployment • Millions of smaller farmers suffer • Many do not gain when world prices rise Macroeconomic effects • Volatile export revenues affects the trade balance • High prices can cause inflation and food poverty

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