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The Working of
Competitive Markets
Radio 4: Business Economics
—Radio 4 via iPlayer
—6:15 to 6:30 am weekdays: business economics
—Link:
http://www.bbc.co.uk/programmes/b006qj9z/episodes/player
—1:00 pm – Extended general news coverage (weekdays)
—Evan Davis: The Bottom Line. Link:
—http://www.bbc.co.uk/programmes/b006sz6t
What is Economics?
— ECONOMICS … in any historical period
— is the study of how society decides to allocate it’s efforts, it’s
time and current resources, to produce and reproduce it’s
material basis:
— L. Robbins (LSE) is famous for his(1932) definition of economics:
“Economics is the science which studies human behaviour as a
relationship between ends and scarce means which have
alternative uses.“ (An Essay on the Nature and Significance of Economic Science)
— We ask: What ? : For whom ? : How ?
— We are actually dealing with a ‘market economy’ of the 21st
century, so we need concepts specific to it
3
From 1930’s economic crisis, it is recognised that ‘Scarcity’
forces us to make choices.
— Opportunity cost is a crucial concept in
economic analysis
— it is the quantity of other goods that must
‘notionally’ be sacrificed to obtain a unit
of another good, as you decide.
— it demonstrates the range of ‘choice’ and
‘cost’ involved in any decision
eg hospital or by-pass, food or fuel.
4
Normative and Positive Economics
— Positive economics deals with ‘objective’
explanation, ‘evidence based’, facts, ‘what is’…
(Given no other conscious manipulation of the
system)
¡ e.g. if a tax is imposed on a good we will observe
that its price tends to rise
— Normative economics offers prescriptions
based on value judgements, preferences, ‘what
should be’…
¡ e.g. a tax SHOULD be imposed on tobacco to
discourage smoking
5
Micro and Macro (1)
— Microeconomics
¡ offers a detailed treatment of individual economic decisions
about particular commodities by firms and consumers
¡ E.g. footballers wages and the output of oil for example, are both
microeconomic issues. They deal with particular branches of
production.
6
Micro and Macro (2)
— Macroeconomics
¡ emphasises the interactions in ‘the economy’
(UK, EU etc) as a whole
¡ Gross domestic product, the aggregate price
level and national unemployment for
example, are all macroeconomic issues.
¡ Government actions directed at overall
management of the economy fall under this
heading
7
Economic models: an example
— To organize our thinking we need a
simplified picture of reality
— focusing on key elements
— Quantity of tube journeys demanded =
function of (Prices, income, preferences)
— Q=f (p,Y,u) – in the shorthand
8
9
“the situation of being free to compete without government interference.”
(Economics-Dictionary.com)
“a free market is a market without economic intervention and regulation by
government except to regulate against force or fraud.” (Wikipedia)
“the fact of being free to compete without government interference.”
(glossaryofmarketing.com; investorwords.com; accounting-dictionary.com)
“unregulated competition for business between companies. a situation in which
companies are allowed to compete with each other to win business without
government intervention or restrictions.” (Qfinance.com)
Note that: ‘Free Competition’ (a political conception)
is NOT the same as THE ECONOMISTS’ formal (‘ideal’) model of PERFECT
COMPETITION.
What does “free competition” mean?
Some key terms
• Market
– a set of arrangements by which buyers and
sellers are in contact to exchange goods or
services (this market is ‘pre-political’)
• Demand
– the quantity of a good buyers wish to purchase
at each conceivable price
• Supply
– the quantity of a good sellers wish to sell at
each conceivable price
• Equilibrium price
– price at which quantity supplied = quantity
demanded
10
Competitive Markets
Business models commonly use an ideal
(simplified conception of) Competitive Market
That is, we use ‘modelling’, and investigate the
relation between only a few KEY variables.
O Consumption of electricity (units)
Price of electricity (pence per unit)
Consumption of electricity at different prices
Observation of real
behaviour: TWO variables:
Price and Quantity
We see that the relation between prices and the quantity of a product demanded
(holding all ‘other things’ constant) can generally be presented as a curve; in its
simplest form this can be drawn as a straight line. This is the DEMAND CURVE,
showing more purchases as the price falls
• “Other things” include:
– the price & nature of related &
competing goods
– consumer incomes
– consumer preferences
• Changes in these other things affect the
position of the demand curve
13
D
Quantity
Price
Utility Theory:
14
The Standard ‘explanation’ for prices falling to obtain extra sales is:
That as consumers consume more, the satisfaction (or utility) they get from
each extra purchase (in a given period) declines.
Each extra or ‘marginal’ purchase provides a lower marginal ‘utility.
So in order to make the extra sale the seller has to reduce the price charged.
The lower price reflects reluctance to purchase a good now giving lower utility:
The next, smaller, sum of money spent reflects the next lower marginal utility
obtained. Buyers allocating their (fixed) income by constantly comparing
needs and the utility of the goods to them.
Buyers try to maximise their total utility, so they seek equal marginal utilities
across all their purchases. They will thus move from one good (jumper) to
another (shirt) until they can find (for their budget) no more goods that have
higher marginal utilities.
MU = D
MU, P
O Q1 Q
P1 a
Consumption at Q1
where P1 = MU
Deriving an individual person’s demand curve
Q2
P2
b
Q3
P3
c
Consumption at Q2
where P2 = MU Consumption at where P3 = MUQ3
90
100
110
120
130
140
150
160
170
0 250 500 750 1000
a
b
c
MU, P (pence per litre)
Q (litres per annum)
MU
Tina’s marginal utility from petrol
0 10 000 15 000
Income (£)
Total utility
70
a
b
5000
100 116
c
Assume your income is
£10 000 and you are offered a
gamble of a 50:50 chance of
winning or losing £5000.
Total utility of income
TU
It follows that
the more
your
consume the
lower the
extra
pleasure you
obtain from
the additional
consumption,
so that
money itself
provides less
utility the
more you
have of it
18
However the ‘First Law of Demand’, descriptively valid in
many situations, may not apply to
(1) very poor consumers facing subsistence concerns – the
‘Giffen Good’ (explained later)
(2) Luxury goods (Veblen theory)
‘keeping up with the Jones’s’
(3) speculative behaviour or theory of the “generalized panic”
(Torres, Córdoba 1992).
In these cases, as ‘exceptions’, the demand curve
rises to the right, i.e. is a positive curve
Business in an ideal ‘Competitive’ Market
The firm’s market environment is critical: many factors but especially competitors
— The key to this market system is the price (is a rationing) mechanism
— PUT SIMPLY
¡ IF mkt shortages: price rises (pushes out those unwilling/unable to pay)
¡ IF mkt surpluses: price falls (attracts the previously less interested/able to pay)
— Effects of changes in demand and supply
¡ a rise in demand
÷price rises ® quantity supplied rises (as less cost effective producers are able
to supply at the higher price) So Supply responds to demand via price
adjustments
¡ a rise in supply
÷price falls ® quantity demanded rises So Demand responds to price changes
Business in an ideal Competitive Market
— The interdependence of markets: it is a Market system, a
division of labour in society, interdependency.
¡ the interdependence of final goods and factor (input) markets
¡ NEXT SLIDE: effect of a rise in the demand for a final good
÷response in final goods market
Goods Market
D
g shortage
(Dg > Sg)
Pg
S
g
D

until D
g = Sg
The adjustment of supply via the price mechanism:
the effect of a rise in demand in the GOODS market
Goods Market
D
g shortage
(Dg > Sg)
Pg
S
g
D

until D
g = Sg
This supposes a flexible response in the Factor Market
S
goods
Sfactors
Df¯
Df shortage until Df = Sf
(Df > Sf)
Pf
The price mechanism:
the effect of a rise in demand on factor markets
Q Assume that there is a fall in demand for a good.
Ceteris paribus (other matters remaining the same), this will result in??
Either ?
A. A rise in the price of the good and a fall in the price of factors
used to make it.
B. A rise in the price of the good and a rise in the price of factors
used to make it.
C. A fall in the price of the good and a fall in the price of factors
used to make it.
D. A fall in the price of the good and a rise in the price of factors
used to make it.
The Theory of Demand
— Relationship between demand and price
¡ the basic ‘law of demand’ : as price falls demand increases
Your response to price changes is a combination of two ‘forces’
÷the income effect
÷the substitution effect
— The demand curve
¡ constructing the demand curve
÷individual and market demand curves
÷assumptions

20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Price (pence per kg)
A
Market demand for potatoes (monthly)
Demand
Price
(pence per kg)
20
Market demand
(tonnes 000s)
A 700
Point

20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
A
B
Demand
Market demand for potatoes (monthly)
Price
(pence per kg)
20
40
Market demand
(tonnes 000s)
700
500
A B
Point
Price (pence per kg)

20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
A
B
C
Demand
Market demand for potatoes (monthly)
Price
(pence per kg)
20
40
60
Market demand
(tonnes 000s)
700
500
350
A BC
Point
Price (pence per kg)

20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
A
B
C
D
Demand
Market demand for potatoes (monthly)
Price
(pence per kg)
20
40
60
80
Market demand
(tonnes 000s)
700
500
350
200
A BCD
Point
Price (pence per kg)

20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Price
(pence per kg)
20
40
60
80
100
Market demand
(kilos 000s)
700
500
350
200
100
A BCDE
Point
A
B
C
D
E
Demand
Market demand for potatoes (monthly)
Price (pence per kg)
Demand
— Determinants of demand OTHER than price
¡ tastes
¡ number and price of substitute goods
¡ number and price of complementary goods
¡ income
¡ distribution of income
¡ expectations
¡ others … e.g. weather,
31
According to some estimates, for example, the top 10% of
German households create about 25% of total consumer
expenditure. Income unevenly distributed, affects buying
patterns
Top 10% of US (2003)
households (not business, military or
instalment) by income (about 30m.
people) account for 22.9% of
new personal consumption and
if you took the 20% households
earning $70,000+ pa (about
60m. people), they accounted
for 38.8% of new personal
consumption expenditure, or
about $1.8 trn. of final
consumption demand that
year.
Price $ high
Prices $ low

Quantity bought rises
Demand
— Movements along and shifts in the demand curve
¡ change in price
Þ movement along D curve ( the ‘demand’ doesn’t increase, it remains a
stable pattern)
¡ change in any other determinant of demand
Þ shift in D curve
¢ increase in demand Þ rightward (or upwards) shift
¢ decrease in demand Þ leftward (or downwards) shift
Two ways in which demand may increase (1)
• (1) A movement along
the demand curve from
A to B
• represents consumer
reaction to a price
change
• (this could follow a
supply shift)
33
A
P0
Q0 Quantity
Price
D
P1 B
Q1
D S1
S2
Two ways in which demand may increase (2)
• (2) A shift of the
demand curve from
D0 to D1
34
A
B
P0
Q0 Q1
D0
Quantity
P Price
1
C
D1
F
Q2Q3
D
o e.g. at P0 quantity
demanded increases from
Q0 to Q2:
at P1 quantity demanded
increases from Q1 to Q3
leads to an increase in
demand at each price
but supply might not meet
demand
D1
Price
P O
Q0 Q1
Quantity
An increase in demand
D0
Possible causes of a shift upwards in
demand
• Tastes shift towards this product
• Rise in price of substitute goods
• Fall in price of complementary goods
• Rise in income
• Expectations of a rise in price
36
In April 2005 new UK building regulations required all new gas central
heating to use ‘condensing boilers’, costing about 30% more to install.
This had an unexpected impact on demand.
The assumption was that ‘replacement’ was a necessity (ie completely
inelastic demand behaviour). BUT there was a 7% slump in demand in
2005iand another 5% in 2006.
Delayed purchase caused a shift to the left in the 2005-2006 D curve.
Defensive spending behaviour like this is gradually overcome as
replacement cannot be deferred (systems break down), pushing the
demand curve out again to the normal replacement rate. In addition
more sales mean economies of scale, and so lower prices, causing a
movement along the curve that has shifted back
P
O Q
D1
Q1
P1
Effect of advertising on the demand curve
D2
P
O Q
D1
Q1 Q2
P1
Demand shifts to the right
and becomes less elastic.
Effect of advertising on the demand curve
Q2
D2
P
O Q
D1
Q1 Q3
P2
P1
If price is raised to P2,
revenue increases by
the shaded area.
Effect of advertising on the demand curve
Q Which way will the market demand for petrol shift
if the price of cars rises?
A. Right (up)
B. Left (down)
C. No shift (movement along the curve)
Q Which way will the market demand for petrol shift
if petrol becomes more expensive?
A. Right
B. Left
C. No shift (movement along the curve)
Deriving the market demand curve
42
Market
Consumer 1
Consumer 2
24
11
13
Quantity
Price
The market demand curve is the horizontal sum
of the individual demand curves
5
If at a price of £5,
consumer 1 demands
11 units and
consumer 2 demands
13 units Then, market
demand at a price of
£5 will be 24 units.
The Working of
Competitive Markets
Supply
The Supply Curve shows the relation between price and
quantity supplied, again assuming
‘other things remaining the same’ (ceterus paribus)
• “Other things” include:
– technology
– input costs
– government regulation
• Changes in these other
things affect the position
of the supply curve
Price
44
Quantity
S
Imagine a queue of suppliers each with higher costs as they
join in the process of actually offering goods to the market
Supply
— Relationship between supply and price
¡ as price rises, firms are usually able to supply more
÷the extra unit costs can be covered
÷firms would be inclined to switch from less profitable goods production
÷in the long run, new firms will be encouraged to enter the market
— The supply curve
¡ constructing the supply curve
÷individual and market supply curves
÷assumptions
¡ generally upward sloping

20
40
60
80
100
0 100 200 300 400 500 600 700 800
Price (pence per kg)
Quantity (kilo tonnes)
S
a
b
c
d
upply
e
P
20
40
60
80
100
Q
100
200
350
530
700
abcde
Market supply of potatoes (monthly)
Supply
— Other determinants of supply than price
¡ costs of production
¡ profitability of alternative products (substitutes in supply)
¡ profitability of goods in joint supply
¡ nature and other random (unforeseen) shocks
¡ Strategic aims of producers
¡ expectations of producers
¡ the number of suppliers
¡ others…
Supply
— Movements along and shifts in the supply curve
¡ change in price
Þ movement along S curve
¡ change in any other determinant of supply
Þ shift in S curve
¢ increase in supply Þ rightward shift (downward)
¢ decrease in supply Þ leftward shift (upward)
P
O Q
S0
Increase
S1
Shifts in the supply curve
Possible causes of an increase in
supply
• Fall in costs of production
• Reduced profitability of alternative
products that could be supplied
• Increased profitability of goods in
joint supply
• Benign shocks
• Expectations of a fall in price
P
O Q
S2 S0 S1
Decrease Increase
Shifts in the supply curve
Q Which way will the market supply of pizzas shift
if the price of flour falls?
A. Right
B. Left
C. No shift (movement along the curve)
The Working of
Competitive Markets
Business in a Competitive Market
— Equilibrium price and output
¡ response to shortages and surpluses
¡ significance of ‘equilibrium’
— Demand and supply curves
Price and Output Determination

20
40
60
80
100
0 100 200 300 400 500 600 700 800
The determination of market equilibrium (potatoes: monthly)
Quantity (kilo tonnes)
E
D
C c
d
e
Supply
Demand
Price (pence per kg)
a A
b B
Market equilibrium (1)
• Market equilibrium is
at E0 where quantity
demanded equals
quantity supplied with
price P0 and quantity
Q0
55
D0
D0 S
S
Price
Q0 Quantity
P0 • E0
’ —
Demand and supply curves
¡ effect of price being above equilibrium
÷surplus ® price falls
Price and Output Determination

20
40
60
80
C
B
a A
b
c
Supply
Demand
100
0 100 200 300 400 500 600 700 800
E
e
Price (pence per kg)
D SURPLUS d
(330 000)
The determination of market equilibrium (potatoes: monthly)
Quantity (tonnes: 000s)
— Equilibrium price and output
¡ response to shortages and surpluses
¡ significance of ‘equilibrium’
— Demand and supply curves
¡ effect of price being above equilibrium
÷surplus ® price falls
¡ effect of price being below equilibrium
÷shortage ® price rises
Price and Output Determination

20
40
60
80
100
0 100 200 300 400 500 600 700 800
E
D
C
a
A
c
d
e
Supply
Demand
Price (pence per kg)
b B
The determination of market equilibrium (potatoes: monthly)
Quantity (tonnes: 000s)

20
40
60
80
D
C
B
a A
b
c
d
Supply
Demand
SHORTAGE
(300 000)
100
0 100 200 300 400 500 600 700 800
E
e
Price (pence per kg)
The determination of market equilibrium (potatoes: monthly)
Quantity (tonnes: 000s)
— Equilibrium price and output
¡ response to shortages and surpluses
¡ significance of ‘equilibrium’
— Demand and supply curves
¡ effect of price being above equilibrium
÷surplus ® price falls
¡ effect of price being below equilibrium
÷shortage ® price rises
¡ equilibrium: where D = S
Price and Output Determination
Equilibrium price and output:
the market demand and supply of potatoes (monthly)
Price of
potatoes
(pence per kilo)
Total market
demand
(tonnes: 000s)
Total market
supply
(tonnes: 000s)
20 700 (A) 100 (a)
40 500 (B) 200 (b)
60 350 (C) 350 (c)
80 200 (D) 530 (d)
100 100 (E) 700 (e)

20
40
60
80
100
0 100 200 300 400 500 600 700 800
D d
Qe
E
B
a
b
A
e
Supply
Demand
Price (pence per kg)
The determination of market equilibrium (potatoes: monthly)
Quantity (tonnes: 000s)
Price and Output Determination
— Effects of shifts in the demand curve
¡ movement along S curve and new D curve
÷rise in demand (rightward shift) ® P rises
A shift in demand
S
S
E1
Price
Quantity
If the price of a substitute
good decreases …
less will be demanded of ours
at each price.
D0
D0
E0
Q0
P0
The demand curve shifts
from D0D0 to D1D1.
D1
D1
Q1
P1
If price stayed at P0 there
would be excess supply.
So, the market moves to a
new equilibrium at E1.
P
O Q
P
e1
Qe1
S
D1
g
Effect of a shift in the demand curve
P
O Q
P
e1
Qe1
S
D1
g
Effect of a shift in the demand curve
P
O Q
P
e1
Qe1
S
D1
D2
g
Effect of a shift in the demand curve
P
O
Qe1
Qe2
P
e1
P
e2
S
g h
D1
D2
i
Q
Effect of a shift in the demand curve
New equilibrium at
point i
A Collapse in demand due to oil price rise, pollution
concerns and ‘taste’ changes
71
Shifts in Demand may arise from many
different factors, so after the Irish
Government’s ban on smoking in public
places in 2004, the total cigarette market in
Ireland fell over 11% in a year. In the UK the
market sales volume fell 2.5% in 2004.
So international corporations like Gallahers,
shifted marketing to Eastern Europe, Central
Asia. Sales in Russia, Ukraine and
Kazakhstan were up 10% in 2004, profits for
the region 32%
72
Consumer culture in rich countries, with its ‘demonstration’
effect on others, has transformed the relation of children to
the market in the last 20 years.
USA: 3-14 yr. olds spending rose from $6.1bn in 1989 to
$30bn in 2002 (400%). To shift the demand curves and create
new ones is the purpose of marketing – ‘pester-power’.
UK National Consumer Council study (2005) says children
love shopping (78%, and average 10 year old knows 300-400
brand names! ),
BUT 71% children believe they are being ‘ripped off’, YET that
56% wished their parents earned more money.
A Psychology of poverty is created!!
Price and Output Determination
— Effects of shifts in the supply curve
¡ movement along D curve and new S curve
÷rise in supply (rightward shift) ® P falls
÷fall in supply (leftward shift) ® P rises
P
O Q
P
e1
Qe1
D
S1
g
Effect of a shift in the supply curve
P
O Q
P
e1
Qe1
D
S1
g
Effect of a shift in the supply curve
P
O Q
P
e1
Qe1
D
S1
S2
g
Effect of a shift in the supply curve
P
O
Qe3 Qe1
P
e1
P
e3
D
S1
S2
j g
k
Q
Effect of a shift in the supply curve
New equilibrium at
point k
A shift in supply
78
D
D
Q0
P0 E0
Price
Quantity
Suppose safety
regulations are tightened,
increasing producers’ costs
S0
S0
S1
S1
The supply curve
shifts to S1S1
If price stayed at P0 there
would be excess demand
Q1
P1
E2
So the market moves to a
new equilibrium at E2
79
2015: French retailer E.Leclerc uses tags in 1/3 of its 600
stores to make more than 5000 price changes a week,
roughly 10 times as many as before the use of new software.
Gogo Inc. (Chicago), provided of in-flight WiFi service, for
commercial and business aircraft. (2015) 12 airlines partner
with Gogo including Aeromexico, American Airlines, Air
Canada, AirTran Airways, Alaska Airlines, Delta Air Lines,
Japan Airlines, United Airlines,US Airways, Vietnam Airlines,
Virgin America and Virgin Atlantic.
It shifts the price (supply curve moves up vertically) of its
inflight internet between $8 and $40 based on route, day,
time, to limit number of users and keep speed high (same
quality)
Q The diagram shows the market for cocoa. Equilibrium is
currently at point x. To which equilibrium point
(1, 2, 3, 4, 5, 6, 7 or 8) will the market move if there is:
A.a rise in the cost of producing
cocoa?
B.a rise in wages in the chocolate
industry?
C.speculation that the price of
cocoa will fall?
D.increased demand for chocolate
and a new tax on cocoa?
S
0 D

D
1
D
2
S
1
S
2
1 x
2
3
4
5
6
7
8
Quantity
Price
The market for Cocoa
The Working of
Competitive Markets
Applications of the Market
Applications of the Market
—Case study: the stock market
¡fluctuations in share prices. Share prices are prices
of a portion of a company’s assets, the price of
ownership
÷historical changes
1000
2000
3000
4000
5000
6000
7000
8000
1984 1988 1992 1996 2000 2004 2008 2012 2016
Financial Times Stock Exchange Index (FTSE 100) and
Retail Price Index (RPI): 3/1/84 = 1000
FTSE 100
Retail Price Index
(RPI)
Note: FTSE figures based on end-of-month values
Sources: Based on data from Consumer Price Inflation time series dataset and various, 2018
Applications of the Market
— Case study: the stock market
¡ fluctuations in share prices
÷historical changes
÷importance of demand and supply
¡ factors influencing demand
÷the dividend yield (the dividend paid out divided by the price paid per share)
÷the price of and/or return on substitutes (not just other company shares, but
any investment)
÷incomes and wealth
÷Expectations of the future economy, and the company’s performance
¡ factors affecting supply
¡ share prices and business
The Working of
Competitive Markets
Market where Prices are Controlled
Markets where Prices are Controlled
— Minimum prices
¡ justification
¡ effects
P
O Q
Pe
minimum
price
Qd Qs
S
D
surplus
Minimum price: price floor
Earlier
European
Community
Agriculture
policy, often
produced
this result
Markets where Prices are Controlled
— Minimum prices
¡ justification
¡ effects
¡ dealing with resulting surpluses
— Maximum prices
¡ justification
¡ effects
maximum
price
P
O Q
Pe
S
D
Qs Qd
shortage
Maximum price: price ceiling
The only way
to remove
this
shortage
AND holding
prices down,
is by shifting
the S curve
right (e.g.
higher
productivity)
A market in disequilibrium
• Suppose a disastrous
harvest moves the supply
curve to SS1
• government may try to
protect the poor, setting a
price ceiling at P1
• which is below P
0, the
equilibrium price level
• The result is excess demand
90
Quantity
P Price

QS Q0
D
S
excess
demand
P1
E
A
B
P2
QD
D S1
RATIONING is needed to
cope with the resulting excess
demand, if black market to be
prevented
S
91
In December 2015 the French Parliament voted to force
supermarkets to give away unsold food, that had reached its
sell by date (from 13 January 2016).
Shops are banned from destroying such food, as in the past.
Individuals can now set up associations to collect and
distribute such food. Est. 7.1m tonnes of food binned in
France each year (67% by consumers, 15% by restaurants,
11% by shops). EU waste is 89m tonnes, and world wide 1.3bn
tonnes. [‘Doggy bags’ are now being introduced in Parisian
restaurants].
Discuss whether/if/ how this will effect the market demand for
food in France, and the resulting consequences for prices.
Q Which one of the following controls would involve setting
a minimum price rather than a maximum price
of a good (or factor)?
A. Controls on rents to protect tenants on low incomes
B. Controls on wages to protect workers on low incomes
C. Controls on basic food prices to protect consumers on
low incomes
D. Controls on transport fares to protect passengers on low
incomes
What, how and for whom
• To summarise; the market
– Seemingly spontaneously decides how much of a good should be produced
• by finding the price at which the quantity effectively demanded (ie with
money in hand) equals the quantity supplied
– tells us for whom the goods are produced
• those consumers willing to pay the equilibrium price
– determines what goods are being produced
• there may be goods for which no consumer is prepared to pay a price at
which firms would be willing to supply
93

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