Price Mechanism in Action

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Price Mechanism in Action

  1. 1. AS Micro The Price Mechanism in Action
  2. 2. Get help from fellow students, teachers and tutor2u on Twitter: #econ1 @tutor2u_econ
  3. 3. These are good connective phrases by contrast… A consequence of this might be … therefore… this might mean… on the other hand…this is because
  4. 4. 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
  5. 5. Functions of the Price Mechanism 1. Allocate – the market mechanism allocates scarce resources 2. Ration – prices serve to ration scarce resources when demand outstrips supply 3. 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
  6. 6. Shift Equilibrium Price Demand increases Higher Demand decreases Lower Supply increases Lower Supply decreases Higher
  7. 7. Shift Equilibrium Price Equilibrium Quantity Demand increases Higher Higher Demand decreases Lower Lower Supply increases Lower Higher Supply decreases Higher Lower
  8. 8. Which direction? Market Change Shift in Supply or Demand? Rise or Fall in Market Price for Crude Oil? A deep recession in many of the world’s advanced economies OPEC decides to introduce lower output quotas for each of their members
  9. 9. Which direction? Market Change Shift in Supply or Demand? Rise or Fall in Market Price for Crude Oil? A deep recession in many of the world’s advanced economies DEMAND OPEC decides to introduce lower output quotas for each of their members
  10. 10. Get help from fellow students, teachers and tutor2u on Twitter: #econ1 @tutor2u_econ
  11. 11. Using an analysis diagram Price of crude oil Quantity of crude oil D1 S1 P1 Q1
  12. 12. Using an analysis diagram Price Quantity of crude oil D1 S1 P1 Q1 D2
  13. 13. Using an analysis diagram Price Quantity of crude oil D1 S1 P1 Q1 D2 P2 Q2
  14. 14. Which direction? Market Change Shift in Supply or Demand? Rise or Fall in Market Price for Crude Oil? A deep recession in many of the world’s advanced economies DEMAND OPEC decides to introduce lower output quotas for each of their members SUPPLY
  15. 15. Using an analysis diagram Price Quantity of crude oil D1 S1 P1 Q1
  16. 16. Using an analysis diagram Price Quantity of crude oil D1 S1 P1 Q1 S2
  17. 17. Using an analysis diagram Price Quantity of crude oil D1 S1 P1 Q1 S2 Q2 P2
  18. 18. The effects of high oil prices Oil Industry • Exploration & Drilling • Investment Consum ers • Cost of living • Real incomes Related sectors • Oil substitutes • Oil supply chain industries
  19. 19. Stakeholders Groups who benefit from high oil prices Groups who lose out from high oil prices Oil companies themselves Industries supplying petroleum businesses Oil exporting nations Government – oil taxes Renewable energy industry
  20. 20. Stakeholders Groups who benefit from high oil prices Groups who lose out from high oil prices Oil companies themselves Consumers of products that uses oil as essential input Industries supplying petroleum businesses Transport businesses e.g. airlines, road haulage Oil exporting nations Consumer goods businesses (less real income to spend) Government – oil taxes Higher oil prices brings in extra revenue Renewable energy industry
  21. 21. The Global Market for Aluminium
  22. 22. Shifts in supply & demand Market Change Shift in Supply or Demand? Rise or Fall in Market Price for Aluminium? A fall in demand for new long-haul aircraft Tighter fuel-efficiency standards for new vehicles in the USA A persistent fall in the world price of steel A rise in the price of bauxite (used in manufacturing aluminium)
  23. 23. Shifts in supply & demand Market Change Shift in Supply or Demand? Rise or Fall in Market Price for Aluminium? A fall in demand for new long-haul aircraft DEMAND FALL Tighter fuel-efficiency standards for new vehicles in the USA A persistent fall in the world price of steel A rise in the price of bauxite (used in manufacturing aluminium)
  24. 24. Shifts in supply & demand Market Change Shift in Supply or Demand? Rise or Fall in Market Price for Aluminium? A fall in demand for new long-haul aircraft DEMAND FALL Tighter fuel-efficiency standards for new vehicles in the USA DEMAND RISE A persistent fall in the world price of steel A rise in the price of bauxite (used in manufacturing aluminium)
  25. 25. Shifts in supply & demand Market Change Shift in Supply or Demand? Rise or Fall in Market Price for Aluminium? A fall in demand for new long-haul aircraft DEMAND FALL Tighter fuel-efficiency standards for new vehicles in the USA DEMAND RISE A persistent fall in the world price of steel DEMAND FALL A rise in the price of bauxite (used in manufacturing aluminium)
  26. 26. Shifts in supply & demand Market Change Shift in Supply or Demand? Rise or Fall in Market Price for Aluminium? A fall in demand for new long-haul aircraft DEMAND FALL Tighter fuel-efficiency standards for new vehicles in the USA DEMAND RISE A persistent fall in the world price of steel DEMAND FALL A rise in the price of bauxite (used in manufacturing aluminium) SUPPLY RISE
  27. 27. Shifts in supply & demand A fall in demand for new long-haul aircraft DEMAND FALL Price of Aluminium Demand Supply P1 Q1 Quantity of Aluminium
  28. 28. Shifts in supply & demand A fall in demand for new long-haul aircraft DEMAND FALL Price of Aluminium Demand Supply P1 Q1 Quantity of Aluminium D2
  29. 29. Shifts in supply & demand A fall in demand for new long-haul aircraft DEMAND FALL Price of Aluminium Demand Supply P1 Q1 Quantity of Aluminium D2 P2 Q2
  30. 30. Shifts in supply & demand Price of Aluminium Demand Supply P1 Q1 Quantity of Aluminium D2 P2 Q2 A rise in the price of bauxite (used in manufacturing aluminium) SUPPLY RISE S2
  31. 31. Shifts in supply & demand Price of Aluminium Demand Supply P1 Q1 Quantity of Aluminium D2 P2 Q2 A rise in the price of bauxite (used in manufacturing aluminium) SUPPLY RISE S2 P3 Q3
  32. 32. Price of Aluminium D1 S1 P1 Q1Quantity of Aluminium Price of Pepsi Max Di Si Pi QiQuantity of Pepsi Max Inter-related markets
  33. 33. Price of Aluminium D1 S1 P1 Q1Quantity of Aluminium Price of Pepsi Max Di Si Pi QiQuantity of Pepsi Max Inter-related markets D2 P2 Q2
  34. 34. Price of Aluminium D1 S1 P1 Q1Quantity of Aluminium Price of Pepsi Max Di Si Pi Qi Quantity of Pepsi Max Inter-related markets D2 P2 Q2 Sii Pii Qii
  35. 35. Get help from fellow students, teachers and tutor2u on Twitter: #econ1 @tutor2u_econ

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