AS Economics Price Mechanism in Action
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Transcript of AS Economics Price Mechanism in Action
![Page 1: AS Economics Price Mechanism in Action](https://reader036.fdocuments.us/reader036/viewer/2022081413/54734794b4af9f9d0a8b52a0/html5/thumbnails/1.jpg)
AS MicroThe Price Mechanism
in Action
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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
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Diagrams matter!
Diagram must havesFully labeledOriginal and new equilibriumDemand and supply the correct way round Well explained – you must explain why the
curve has shifted, in detailThink about the elasticity – e.g. oil has
inelastic demand and supply
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Shift Equilibrium Price
Demand increases Higher
Demand decreases Lower
Supply increases Lower
Supply decreases Higher
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Shift Equilibrium Price Equilibrium Quantity
Demand increases Higher Higher
Demand decreases Lower Lower
Supply increases Lower Higher
Supply decreases Higher Lower
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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 economiesOPEC decides to introduce lower output quotas for each of their members
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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
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Using an analysis diagramPrice
Quantity of crude oil
D1
S1
P1
Q1
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Using an analysis diagramPrice
Quantity of crude oil
D1
S1
P1
Q1
D2
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Using an analysis diagramPrice
Quantity of crude oil
D1
S1
P1
Q1
D2
P2
Q2
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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
![Page 12: AS Economics Price Mechanism in Action](https://reader036.fdocuments.us/reader036/viewer/2022081413/54734794b4af9f9d0a8b52a0/html5/thumbnails/12.jpg)
Using an analysis diagramPrice
Quantity of crude oil
D1
S1
P1
Q1
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Using an analysis diagramPrice
Quantity of crude oil
D1
S1
P1
Q1
S2
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Using an analysis diagramPrice
Quantity of crude oil
D1
S1
P1
Q1
S2
Q2
P2
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The effects of high oil prices
P6
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StakeholdersGroups 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
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StakeholdersGroups 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
Renewable energy industry
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The Global Market for Aluminium
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Shifts in supply & demandMarket 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)
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Shifts in supply & demandMarket 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)
![Page 22: AS Economics Price Mechanism in Action](https://reader036.fdocuments.us/reader036/viewer/2022081413/54734794b4af9f9d0a8b52a0/html5/thumbnails/22.jpg)
Shifts in supply & demandMarket 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)
![Page 23: AS Economics Price Mechanism in Action](https://reader036.fdocuments.us/reader036/viewer/2022081413/54734794b4af9f9d0a8b52a0/html5/thumbnails/23.jpg)
Shifts in supply & demandMarket 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)
![Page 24: AS Economics Price Mechanism in Action](https://reader036.fdocuments.us/reader036/viewer/2022081413/54734794b4af9f9d0a8b52a0/html5/thumbnails/24.jpg)
Shifts in supply & demandMarket 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
![Page 25: AS Economics Price Mechanism in Action](https://reader036.fdocuments.us/reader036/viewer/2022081413/54734794b4af9f9d0a8b52a0/html5/thumbnails/25.jpg)
Shifts in supply & demandA fall in demand for new long-haul aircraft
DEMAND FALL
Price of Aluminium
Demand
Supply
P1
Q1 Quantity of Aluminium
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Shifts in supply & demandA fall in demand for new long-haul aircraft
DEMAND FALL
Price of Aluminium
Demand
Supply
P1
Q1 Quantity of Aluminium
D2
![Page 27: AS Economics Price Mechanism in Action](https://reader036.fdocuments.us/reader036/viewer/2022081413/54734794b4af9f9d0a8b52a0/html5/thumbnails/27.jpg)
Shifts in supply & demandA fall in demand for new long-haul aircraft
DEMAND FALL
Price of Aluminium
Demand
Supply
P1
Q1 Quantity of Aluminium
D2
P2
Q2
![Page 28: AS Economics Price Mechanism in Action](https://reader036.fdocuments.us/reader036/viewer/2022081413/54734794b4af9f9d0a8b52a0/html5/thumbnails/28.jpg)
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
![Page 29: AS Economics Price Mechanism in Action](https://reader036.fdocuments.us/reader036/viewer/2022081413/54734794b4af9f9d0a8b52a0/html5/thumbnails/29.jpg)
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
![Page 30: AS Economics Price Mechanism in Action](https://reader036.fdocuments.us/reader036/viewer/2022081413/54734794b4af9f9d0a8b52a0/html5/thumbnails/30.jpg)
Price of Aluminium
D1
S1
P1
Q1Quantity of Aluminium
Price of Pepsi Max
Di
Si
Pi
QiQuantity of Pepsi Max
Inter-related markets
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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
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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
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Analysis
Evaluation
Application
Good application opens the door to good analysis and good evaluation
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Why are prices volatile in the markets for many commodities?
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Using analysis diagramsPrice
Quantity
Price
Quantity
S1
D1 D2
P1
P2
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Using analysis diagramsPrice
Quantity
Price
Quantity
S1
D1 D2
P1
P2S1
D1
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Using analysis diagramsPrice
Quantity
Price
Quantity
S1
D1 D2
P1
P2S1
D1
S2
P1
P2
RISE IN MARKET SUPPLYRISE IN MARKET DEMAND
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Problems arising from price volatility