Interesting article here, which claims that printer ink is the equivalent of $8,000 per gallon, which makes petrol look cheap. Printer Ink is expensive – $8,000 per gallon. Reasons Printer Ink is So Expensive? 1. Printers are sold cheaply. The business model of many printer companies is to sell printers at a low cost, and …
Supply and demand are a fundamental basis of economics; they help explain the determination of price and output in different markets. The supply curve shows the amount of goods firms are willing to sell at different prices. At higher prices, it becomes more profitable to sell the goods, so supply tends to rise with the …
This is a collection of diagrams for supply and demand. It is mainly for my benefit, so when creating a post, like the price of tea (or when I’m teaching online) I can easily find a suitable diagram to illustrate what is happening.
Supply Shifts to the left
In this diagram the supply curve shifts to the left. It leads to a higher price and fall in quantity demand. The supply curve may shift to the left because of:
Higher costs of production
Fall in productivity
Supply and Demand Shift Right
In this diagram, supply and demand have shifted to the right. This has led an increase in quantity (Q1 to Q2) but price has stayed the same.
It is possible, that if there is an increase in demand (D1 to D2) this encourages firms to produce more and so supply increases as well.
Diagram showing Increase in Price
In this diagram, we have rising demand (D1 to D2) but also a fall in supply. The effect is to cause a large rise in price.
For example, if we run out of oil, supply will fall. However, economic growth means demand continues to rise.
Increase in Demand
An increase in demand leads to higher price and higher quantity.
Definition: Scarcity refers to resources being finite and limited. Scarcity means we have to decide how and what to produce from these limited resources. It means there is a constant opportunity cost involved in making economic decisions. Scarcity is one of the fundamental issues in economics.
Examples of scarcity
Land – a shortage of fertile land for populations to grow food. For example, the desertification of the Sahara is causing a decline in land useful for farming in Sub-Saharan African countries.
Water scarcity – Global warming and changing weather, has caused some parts of the world to become drier and rivers to dry up. This has led to a shortage of drinking water for both humans and animals.
Labour shortages. In the post-war period, the UK experienced labour shortages – insufficient workers to fill jobs, such as bus drivers. In more recent years, shortages have been focused on particular skilled areas, such as nursing, doctors and engineers
Health care shortages. In any health care system, there are limits on the available supply of doctors and hospital beds. This causes waiting lists for certain operations.
Seasonal shortages. If there is a surge in demand for a popular Christmas present, it can cause temporary shortages as demand as greater than supply and it takes time to provide.
Fixed supply of roads. Many city centres experience congestion – there is a shortage of road space compared to number of road users. There is a scarcity of available land to build new roads or railways.
How does the free market solve the problem of scarcity?
If we take a good like oil. The reserves of oil are limited; there is a scarcity of the raw material. As we use up oil reserves, the supply of oil will start to fall.
Diagram of fall in supply of oil
If there is a scarcity of a good the supply will be falling, and this causes the price to rise. In a free market, this rising price acts as a signal and therefore demand for the good falls (movement along the demand curve). Also, the higher price of the good provides incentives for firms to:
Look for alternative sources of the good e.g. new supplies of oil from the Antarctic.
Look for alternatives to oil, e.g. solar panel cars.
If we were unable to find alternatives to oil, then we would have to respond by using less transport. People would cut back on transatlantic flights and make fewer trips.
Demand over time
In the short-term, demand is price inelastic. People with petrol cars, need to keep buying petrol. However, over time, people may buy electric cars or bicycles, therefore, the demand for petrol falls. Demand is more price elastic over time.
Therefore, in a free market, there are incentives for the market mechanisms to deal with the issue of scarcity.
With scarcity, there is a potential for market failure. For example, firms may not think about the future until it is too late. Therefore, when the good becomes scarce, there might not be any practical alternative that has been developed.
Another problem with the free market is that since goods are rationed by price, there may be a danger that some people cannot afford to buy certain goods; they have limited income. Therefore, economics is also concerned with the redistribution of income to help everyone be able to afford necessities.
Another potential market failure is a scarcity of environmental resources. Decisions we take in this present generation may affect the future availability of resources for future generations. For example, the production of CO2 emissions lead to global warming, rising sea levels, and therefore, future generations will face less available land and a shortage of drinking water.
The problem is that the free market is not factoring in this impact on future resource availability. Production of CO2 has negative externalities, which worsen future scarcity.
Tragedy of the commons
The tragedy of the commons occurs when there is over-grazing of a particular land/field. It can occur in areas such as deep-sea fishing which cause loss of fish stocks. Again the free-market may fail to adequately deal with this scarce resource.
Definition: Monopolistic competition is a market structure which combines elements of monopoly and competitive markets. Essentially a monopolistic competitive market is one with freedom of entry and exit, but firms can differentiate their products. Therefore, they have an inelastic demand curve and so they can set prices. However, because there is freedom of entry, supernormal profits will encourage more firms to enter the market leading to normal profits in the long term.
A monopolistic competitive industry has the following features:
Freedom of entry and exit.
Firms produce differentiated products.
Firms have price inelastic demand; they are price makers because the good is highly differentiated
Firms make normal profits in the long run but could make supernormal profits in the short term
Firms are allocatively and productively inefficient.
Diagram monopolistic competition short run
In the short run, the diagram for monopolistic competition is the same as for a monopoly.
The firm maximises profit where MR=MC. This is at output Q1 and price P1, leading to supernormal profit
Monopolistic competition long run
Demand curve shifts to the left due to new firms entering the market.
In the long-run, supernormal profit encourages new firms to enter. This reduces demand for existing firms and leads to normal profit. I
Efficiency of firms in monopolistic competition
Allocative inefficient. The above diagrams show a price set above marginal cost
Productive inefficiency. The above diagram shows a firm not producing on the lowest point of AC curve
Dynamic efficiency. This is possible as firms have profit to invest in research and development.
X-efficiency. This is possible as the firm does face competitive pressures to cut cost and provide better products.
Government price controls are situations where the government sets prices for particular goods and services. Types of price controls Minimum prices – Prices can’t be set lower (but can be set above) Maximum price – Limit to how much prices can be raised (e.g. market rent) Buffer stocks – Where government keep prices within a certain …
Readers Question: Using data and your economic knowledge assess the case for and against a government completely banning the sale and consumption of cigarettes. AQA (15)
1. Cigarettes are a demerit good. People underestimate the costs of smoking, e.g. lower life expectancy. It has been suggested that the true cost of a packet of cigarettes is over $200. Therefore, the government is justified to try and stop people consuming goods which harm them.
2. Cigarettes have negative externalities on the rest of society. For example, it creates health problems of passive smoking. This leads to over consumption and is another justification for banning smoking.
3. Tax is insufficient for reducing consumption of cigarettes. Demand is very price inelastic because people become addicted. Therefore, banning cigarettes may be the only way to reduce consumption.
For many goods we expect the price to be determined by market forces – by supply and demand. For example, computers, cars, holidays, food e.t.c. However, there is another class of good where society dislikes the idea of prices being set by market forces. The best example is football tickets or Concert tickets. . In …