price mechanism in action
TRANSCRIPT
AS MicroThe Price Mechanism
in Action
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These are good connective phrases
by contrast…
A consequence of this might be
…
therefore…
this might
mean… on the other hand…this is because
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
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
Shift Equilibrium Price
Demand increases Higher
Demand decreases Lower
Supply increases Lower
Supply decreases Higher
Shift Equilibrium Price Equilibrium Quantity
Demand increases Higher Higher
Demand decreases Lower Lower
Supply increases Lower Higher
Supply decreases Higher Lower
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
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 of
crude oil
Quantity of crude oil
D1
S1
P1
Q1
Using an analysis diagramPrice
Quantity of crude oil
D1
S1
P1
Q1
D2
Using an analysis diagramPrice
Quantity of crude oil
D1
S1
P1
Q1
D2
P2
Q2
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
Using an analysis diagramPrice
Quantity of crude oil
D1
S1
P1
Q1
Using an analysis diagramPrice
Quantity of crude oil
D1
S1
P1
Q1
S2
Using an analysis diagramPrice
Quantity of crude oil
D1
S1
P1
Q1
S2
Q2
P2
The effects of high oil prices
Oil Industry
• Exploration & Drilling
• Investment
Consumers• Cost of living• Real
incomes
Related sectors
• Oil substitutes
• Oil supply chain industries
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
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 Higher oil prices brings in extra revenue
Renewable energy industry
The Global Market for Aluminium
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)
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)
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)
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)
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
Shifts in supply & demandA fall in demand for new long-haul aircraft
DEMAND FALL
Price of Aluminium
Demand
Supply
P1
Q1 Quantity of Aluminium
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
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
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
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
Price of Aluminium
D1
S1
P1
Q1Quantity of Aluminium
Price of Pepsi Max
Di
Si
Pi
QiQuantity of Pepsi Max
Inter-related markets
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
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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