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Table of Contents

  1. Topic pack - Microeconomics - introduction
  2. 1.1 Competitive Markets: Demand and Supply
  3. 1.1 Competitive Markets: Demand and Supply - notes
    1. The nature of markets
    2. Types of markets
    3. Market structure
    4. Spectrum of competition
    5. Demand
    6. The law of demand
    7. Individual and market demand
    8. Non-price determinants of demand
    9. Movements along the demand curve
    10. Shifts in the demand curve
    11. Example - shifts and movements along a demand curve
    12. Exceptions to the normal law of demand
    13. Linear demand functions
    14. Linear demand functions - example
    15. The law of supply
    16. Non-price determinants of supply
    17. Movements along the supply curve
    18. Shifts in the supply curve
    19. Shifts and moves of supply curve
    20. The real supply curve?
    21. Linear supply functions
    22. Linear supply functions - example
    23. Market equilibrium
    24. Market equilibrium - notes
    25. Excess demand and excess supply
    26. Example 1 - the market for DVD players
    27. Example 2 - the market for fish
    28. Applications of demand and supply
    29. Calculating market equilibrium
    30. Calculating equilibrium - example
    31. Scarcity and choice
    32. Choice and opportunity cost
    33. Price signalling
    34. Market efficiency - consumer surplus
    35. Market efficiency - producer surplus
    36. Allocative efficiency
  4. 1.1 Competitive markets - questions
  5. 1.1 Competitive markets - simulations and activities
  6. 1.2 Elasticities
  7. 1.2 Elasticities - notes
  8. Section 1.2 Elasticities - questions
  9. Section 1.2 Elasticities - simulations and activities
  10. 1.3 Government intervention
  11. 1.3 Government Intervention - notes
  12. 1.3 Government intervention - questions
  13. 1.3 Government intervention - simulations and activities
  14. 1.4 Market failure
  15. 1.4 Market failure - notes
  16. Section 1.4 Market failure - questions
  17. Section 1.4 Market failure - simulations and activities
  18. 1.5 Theory of the firm
  19. 1.5 Theory of the firm - notes (HL only)
  20. Section 1.5 Theory of the firm - questions
  21. Section 1.5 Theory of the firm - simulations and activities
  22. Print View

Applications of demand and supply

Markets rarely react fast, so it takes time for the market to regain equilibrium after it has experienced a change (known as a shock). Examine Figure 1, which shows the effect of an increase in demand on the market for new houses in an area. Assume that a major, large government department has just announced that it is to relocate to this area.


NB. the S on the vertical supply is missing - diagrams MUST be fully labelled, also the excess demand is not i shown where is it on the diagram?

Figure 1 The market for new houses

The initial market was defined by demand curve D and supply curve S. The market was in equilibrium at price P1 when Q1 new houses were bought and sold. The entry of the government department will increase demand and shift the demand curve to D1. Supply will take time to react so price will rise initially to P2, then fall back slowly to P3 as the supply of houses increases. It will move from one equilibrium position, P1Q1, to another, P3Q2, over a period of time. It will pass through P2Q1 on the way. NB How the diagram is uased to explain the changes and their effects.

Further examples are the markets for drugs or alcohol. Suppose the police were to really crack down on drug dealing, with considerable but not perfect effect. What would happen?

The US Government once tried to ban the sale, and hence consumption, of alcohol in America, but with only partial success. What happened here? Look at Figure 2.


Figure 2 The drug or alcohol market

In both cases the measures had no effect on demand, but reduced supply. So price would go up because the quantity available would fall.

For the drugs, the street price would be an indication of the success of the police. The greater the rise, the greater the degree of success.